Defined fractional reserve banking as banking system

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Reference no: EM132261932

1. There are two things that a financial institution must do to be classified as a Bank. What are these two things?

2. we defined fractional reserve banking as a banking system in which banks normally retain less money (liquid assets) than their depositors have a right to claim. We noted that fractional reserve banking is nothing new, it has existed since ancient times. The fractional reserve system enhances the potential profitability of banks, but we noted that it is associated with one Major Problem, a problem so serious as to sometimes threaten the continued existence of the bank. What is this one most serious Problem?

3. we noted that in ancient times money was normally created by government. However, under the modern banking system in the U.S. and other developed countries, money is normally created by Banks. The process begins when a depositor brings, let’s say, $100 in M1 into the bank for deposit. The bank accepts the deposit and creates a Demand Deposit (DD) for the customer in the amount of $100. Is this new DD counted as M1?

Reference no: EM132261932

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