ECN 204 Chapter Notes - Chapter 9: Canada Deposit Insurance Corporation, Excess Reserves, Money Supply
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Week 9 – CECN 204 – Banks
Commercial banks/ chartered banks
Chartered banks are financial intermediates which accepts deposits (liabilities) and loans
(assets)
- They are corporations owned by shareholders with a goal to maximize profits (interest
rate differential (spread).
Unit banking (USA): small, individually owned banks with few branches
Branch banking (Canada): Few big banks with many branches (oligopoly)
*Share holders cannot own more than 10% of shares in a bank
Schedule I: Canadian owned banks at least 75% shares must be Canadian owned
Schedule II: Foreign banks operating in Canada
Safeguards to prevent run on the bank
1. All deposits up to a max of $100,000 are insured by CDIC (Canadian Deposit Insurance
Corporation)
2. All banks are regulated by the federal government
3. All banks are supervised by bank of Canada
4. All bank records are audited regularly
5. Watch dogs OSFI (office of superintendent of financial institution)
6. All banks must keep a specified minimum % of deposits as cash reserves
CRR – cash reserve ration/ required reserves
DRR – desired reserve ration
Any reserves over and above the CRR/DRR = excess reserve
Process of credit/ deposit creation
Initial/primary deposits – account holder is the creditos and the bank is debtor
Desired/ secondary deposits – account holder is debtor and bank is creditor
Initial deposit= $1000 and CRR/DRR = 20%
in deposits = in initial deposits x (1/ CRR/DRR)
look at graph : 1000 x 1/ 0.2 = 5000
in money supply = in deposits – initial deposits
5,000 – 1,000 = 4,000
M/C question: initial deposit= 500 and CRR/DRR= 25%
Find in deposits and in money supply
500 x 1/0.25 = 2000 [ in deposits]
2000 – 500 = 1500 [ in money supply]
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