Statements {bank statement} can indicate bank deposits and payments.
Organizations {clearinghouse}| receive checks or orders from member banks or market traders and arrange and disburse payments among members efficiently.
Money {demand deposit}| can be in checking accounts.
Government can insure deposits {deposit insurance} in banks that it regulates. Banks pay fees to provide insurance.
Commercial banks can get credit from Federal Reserve {discount window}.
Banks use checking-account money to sell money {loan}| to people and businesses. Checking-account holders have right to withdraw money.
reserves
In case checking-account holders withdraw money, banks must keep a reasonable or regulated percentage of checking-account money on hand. Banks do not need all checking-account money, because only a percentage of customers need only a percentage of money. Banks like to loan all the money they can {loaned up}. Getting more customers adds to reserves. Loan repayments add to bank reserves, allowing more loans.
reserves: percentage
If reserve percentage is 25%, bank can loan four times amount it has in reserve (1 / 0.25 = 4).
reserves: government
Government can reduce demand by increasing reserve ratio.
Banks have checking accounts with national or central bank and only keep enough money {reserves, bank}| {bank reserves} to meet expected demand from checking-account customers, because it is unlikely that all people will demand their money at once. By law, reserves must be a percentage, typically 25%, of bank demand deposits. When bank receives checking-account deposits, it places some money in reserves and has the rest available to make loans.
Depositors can demand their money back, which can cause others to demand it, in fear money will run out {run on the bank}. Panic of 1873, Panic of 1907, and bank runs in 1930, 1931, and 1933 are examples. Panic of 1907 was a run on trusts, which managed estates, speculated in real estate and stocks, had deposits, had little regulation, and had lower reserves. New York trusts did not belong to New York Clearinghouse group of national banks.
People can buy drafts {traveler's check}| to take to other countries, where banks and merchants accept them.
USA Federal Reserve System [1913], European Central Bank, and Bank of Japan {central bank} can raise and lower interest rates, loan money to banks, and require different percentages of reserves.
Banks {commercial bank}, created by Glass-Steagall Act, can accept deposits and must have deposit insurance.
Banks {investment bank}, created by Glass-Steagall Act, do not accept deposits and so do not have classic bank runs.
An international bank {World Bank}, supported by member contributions, loans money, with conditions, to troubled economies.
Investment banks, hedge funds, and the like {shadow banking system} perform banking functions. Instruments include auction-rate securities, structured investment vehicles, tender option bonds, variable-rate demand notes, and asset-backed commercial paper.
People can long-term lend {auction-rate security} to institutions, which weekly auction right to replace current lenders, to set interest rate, which holds until next auction. If no auction transaction happens, interest rate goes higher. Institution can have long-term financing, and investors can get in and out.
Mortgage pools {collateralized debt obligation} (CDO) haves shares, some with priority {senior share}.
Funds {hedge fund} can buy short and buy long.
long
Buying long means to buy now and wait for asset to rise in price.
short
Buying short means to borrow stock from owner, by using small down payment. Then sell stock at current price to someone else to get difference of price and down payment. Then buy stock from someone on or before due date. Then sell back to owner at specified price on specified date. Buying short expects price to fall, so future price is lower than current price. However, short sellers that have big losses can be unable to buy back stock.
Creditors can demand payment from borrowers {margin call}, typically when borrower's asset value or collateral value decreases, worrying creditors. Borrowers must then pay more down payment or sell asset to pay creditors. Selling makes asset values decrease and so can affect other creditors' confidence.
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Date Modified: 2022.0225