Banks are financial institutions which are used by individuals to deposit their money and earn interest on their savings.
Banking helps in the credit creation process and allows lenders to borrow money and take loans by paying interest and providing the adequate resources as collateral security.
Banking is the approach used to help people to encourage them to save their money and help in the process of creating credit for the economy.
With manuals as Overview of Fractional Reserve Banking homework answers, you can get complete details of the fact.
Queries that you may have:
Here are some of the basic queries that you may have in regards to this subject.
- What are functions of a Bank?
Banks are an essential part of the financial world and have a lot of importance functions as have been described below:
- Encouraging People to become a part of the Financial World
Banks encourage people to use the banks to save their money and get a return on their savings in the form of interest. Such behavior in the population results in a healthier and safer economy.
- Lending and borrowing services
Banks provide a lot of services amongst them the most frequently used is the lending and borrowing service. The banks act as the lender of money to their customers in the form of loans, advances and over-drawing limits. They charge interest on such services.
- Other forms of withdrawing money
The banks provide their customers various ways to use their money without the hassle of carrying them around with them. Some of them are:
- Drawing a check on their bank account
- Using credit cards or debit cards
- Using online wallets
- Making a money order or a demand draft from their bank account
- Give an Overview of Fractional Reserve Banking
When the banks collect deposits from their customers, instead of just collecting the amount in their bank vaults, they use the Fractional Reserve Banking method. An Overview of Fractional Reserve Banking homework answers is that instead of just letting the entire amount of the deposits sit with them, they just store a certain fraction of the total deposit. The rest of the deposits are used for a lot of different purposes to help the bank in making profit.
- What are the types of money in a Fractional Reserve Banking system?
In an Overview of the Fractional Reserve Banking system are primarily two types of money which are:
- Commercial Bank Money
This is a number of deposits made by the customers to their respective banks which are then used by the banks as loans and advances.
- Central Bank Money
This is the form of money used by the Central Bank of the country. It can be in the form of gold reserves, bank notes, certificates, electronic money, bonds or precious metal.
- What is the Reserve Requirement in Fractional Reserve Banking?
The certain fraction of the total deposits kept by the bank is known as Reserve Requirement. This is reserved to ensure the liquidity of the bank and help the consumers to undertake their necessary transactions. As per the Overview of Fractional Reserve Banking homework answers, the deposits of the bankâ€™s customers are represented as a liability in the balance sheet of the bank. But the bank accounts provided to the customers are an asset for them. Thus the deposits are a property of the banks, and the remainders from the Reserve Requirement are used by the banks to gain revenue from providing various facilities.
- How do banks use the Fractional Reserve Banking?
With the help of an Overview of the Fractional Reserve Banking method, the banks, and the economy are able to be benefitted in a lot of ways. Manuals Overview of the Fractional Reserve Banking homework answers you can get a detailed idea. Some of them are:
- The method of using Fractional Reserve Banking enables the banks to use the deposits other than the Reserve Requirements, as loans and advances.
- They help the bank in the process of credit creation whereby the banks are able to increase their deposits by increasing the volume of loans given and in turn affect the flow of currency in the economy.
- This method helps the banks to earn interest by the way of giving loans at a particular rate of interest.
- It ensures that there are no idle resources lying around with the banks but can be used for investment in capital assets and other infrastructure to increase the level of well-being of the society.
- This method of banking helps to control the inflation in the economy. As shown in manuals as Overview of the Fractional Reserve Banking homework answers controls the credit creation process and the flow of currency in the economy, these factors enable the banks to control the inflation prevalent in the country.
- Multiplier effect is another important aspect when it comes to Fractional Reserve Banking. With the help of giving loans and creating opportunities for increasing the purchasing power of the population, demand for new products is created in market which leads to their production. Hence it helps to regulate the market too.
- What is the hierarchy in a Fractional Reserve Banking system?
In a Fractional Reserve Banking system, there is a hierarchy present which is as follows:
- Government or Central Bank
The Government or the presence of a Central Bank regulates the rules and regulations in a Fractional Reserve Banking System. It regulates the following:
- The reserve requirement of the bank with regard to the deposits held by them.
- The capital ratios.
- It acts as a banker of the banks in times of distress or simply to facilitate the transactions between the banks.
- Other Banks
As described above the other banks maintain the reserve requirements and give loans and advances for the betterment of the economy.
- What are the needs for a reserve requirement?
As per the Overview of the Fractional Banking homework answers, the needs for a reserve requirement are as follows:
- To control the amount of deposits that the banks have with themselves in the various savings, current and deposit accounts.
- To ensure that enough liquid assets are available with the banks to cater to their customers whenever they have to make a financial transaction.
- The reserve requirements ensure the control of the Government over the flow of monetary units in the economy.
- What are the cons of having a Fractional Reserve Banking system?
There are a lot of benefits to the economy when there is an Overview of Fractional Reserve Banking homework answers, but there are a few cons too which have been described briefly below:
- In times of financial or natural crisis when the population starts withdrawing at the same time, it can lead to a cash crunch. This is because due to the reserve requirements only a certain amount of the total deposits are available with the bank and when more than the actual reserve is demanded by the customers it can lead to a temporary shutdown of the banks
- Generally the customers of the banks have no idea regarding the nature of the loan being given by the bank out of their deposits. The credibility of the banksâ€™ debtors is not guaranteed to the customers of the bank it puts their money at risk. It can result in a huge loss, or they may just get an increase on their savings in the form of a nominal interest. But it can be a very risky venture for the common population.