Reasons for Bank Failures
1. Willingness to accept greater risk in its operation
2. Rapid expansion of bank services without proper evaluation
3. Decline in economy
4. Bad loans
5. Fall in stock prices
6. Crimes
Branch Banking
Branch banking consists of different branches at different locations and services are sold through by multiple offices or owned by the same operation.
Advantage of Branch Banking:
1. Bank can access to a broader market through branches
2. Bank can collect deposits from various regions
3. Bank can reduce risk by offering loans to various sectors
Creation of Money by Bank
Banks have the power to create money equal to a multiple of any excess reserve deposited with it by making loans and purchasing securities.
The law requires a bank to hold a fraction of the deposit received from the public as cash reserves. Thus it frees up a majority of incoming funds for making loans and purchasing securities. Vault cash and deposit at the central bank constitute a bank's holding reserves and these assets are used for meeting legal requirements behind the public's deposits.
Legal reserves maybe divided into two categories. One is required reserves and another is excess reserves. Required reserve is equal to a certain percent of the volume of deposits.
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For example, if the bank holds Tk. 1,000 in deposits and law requires it to hold 20% in legal reserves, the required reserves would be Tk. 200. Excess reserve is equal to the difference between the total legal reserves held by bank and the amount of required reserves.
Deposit: $ 1000 in Bank A
Reserve Requirement: 20%
Required Reserve Excess
Bank A: 200 800
Bank B: 160 640
Bank C: 128 512
Money Creation = 1000/0.20 = 5000
Deposit Multiplier = 1/reserve requirement = 1/0.20 = 5
Destruction of Money
Similarly, the banking system can contract deposits by multiple amount when deposits are withdrawn from a bank.
Withdrawal = $1000
Required Reserve = 20%
Deficiency Required Reserve
Bank A: 800 200
Bank B: 640 160
Bank C: 512 128
Implication of Money Creation & Destruction
Creation of money by the banking system is one of the most important sources of creating funds in the economy. So money created by banks is instantly available for spending. If this creation of money is not carefully handled by the government, it can fuel inflation and destruction of money, can create deflation in the economy.
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