ECON 204 1st Edition Lecture 15Outline of Last Lecture XX. About MoneyA. Roles of moneyB. Types of moneyC. Measuring money supplyOutline of Current LectureXXI. BankingA. Bank regulationsCurrent LectureXXI. BankingAlgorithms versus abacus’s – different ways of accounting originBank: financial intermediary that uses liquid assets in form of bank deposits to finance the illiquid investments of borrowers. Banks (put simply) move money from people who do not need it at the moment to those who do. T-account: tool for analyzing a businesses financial position by using a single table (T-shaped)with the businesses assets and liabilities (banks use T-accounts). How banks create money: a portion of one persons deposits become another persons loan. Fraction of money loaned out is added to the money supply- in circulation.Banks do not lend out all money.Bank reserves: money in bank vaults and deposits at the Federal Reserve. Banks keep moneyin vaults for legal requirements and protection.Reserve ratio: the fraction bank holds as resources, minimum reserve ratio in the U.S is 10%Excess reserves: bank reserves are over and above its required reservesEx: increase in bank deposits from $1000 in excess reserves = $1000/m m=1/rrBank runs: main risk to bank, why they have reserves. A bank run is when many of the banks depositors try to withdraw their funds at once (can be incited by one person leading to panic). Ex: U.S in 1929, FDR responded to the massive bank runs by closing all of the banks.A. Bank RegulationsThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.Regulations, such as the 10% reserve ratio minimum, have been imposed to protect wealthy countries. 1. Deposit insurance: Fed guarantees you at least 250,000 dollars. Part of this can be withdrawn from separate banks but maximum 250,000 dollars per account. 2. Capital requirement: Meaning the bank must keep a certain amount of assets. In practice the bank’s capitol is equal to 7% or more of their assets. 3. Reserve requirement: rules set by the Fed that determine the minimum reserve ration for banks. Discount window: arrangement where Fed stands ready to lend money to banks in trouble (not desirable for banks). Limits of these regulations: oversight, financial innovation, compliance when risk taking is highly profitable and complexity. Comparison: banks make labyrinths. Also why would a banker about to profit care about the negative impact on the rest of society. Any incentive driven system can be