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Chapter 14: Money Creation

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How commercial banks can create checkable deposits and issue loans?

By this, money is created! What is a commercial bank? Commercial bank: an institution that receive

deposits and make loans Bank’s balance sheet: assets and liabilities

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2 banks:

Two different banks in general: The central bank: The Central Bank of Kuwait, The Federal

Reserve (the Fed) The commercial banks (NBK, GB...)

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Bank’s balance sheet

Assets: cash, deposits at other banks, deposits at the Fed, commercial papers, securities, loans

Liabilities: checkable deposits, saving deposits, time deposits,

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Functions of commercial banks

Open accounts (checkable, saving, time…) Providing loans (different dimensions…) Services to businesses Other services…

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The central bank

Since commercial banks play an important role in the economy (why?)… the central bank is the institution that supervises commercial banks:

Inspection of records Inspection of activities Required reserve Liquidity requirements Insurance

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Functions of the CB

Supervising commercial banks Bank of the last resort “bank of the state” Determining the discount rate Selling and buying government’s bonds