- Provide liquidity – use short term deposits to make long term loans
- Lower the cost of borrowing money
- Pool the risk associated with lending money and monitor the risk
Fractional reserve banking system:
The Fed requires all deposit-taking banks to hold a fraction of those deposits as reserves. Since these reserves do not earn interest, banks try not to hold any excess reserves.
The Required Reserve Ratio:
The percentage of a particular liability category (to the bank), such as savings accounts, that must be held as reserves.
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