EVOLUTION OF

BANKING
BANKING AND MONEY SUPPLY
BANKING AND SUPPLY OF MONEY

• Banks are fundamentally business organized to earn profit for their owners
• Give services to their owners
• Receive payments from customers
• Basic assets; Reserves, loans, investment securities
• Liabilities; Checking deposits, savings and time deposits, net profit worth
TYPES OF BANKING SYSTEM
• COMERCIAL BANKING
• Early gold smith establishments
• Store people gold
• Receipt of keeping gold
• That receipt was also used as medium of exchange
• 100% RESERVE BANKING
• Banks saved 100% of their deposits
• Do nothing
• No influence on economy
FRACTIONAL RESERVE BANKING

• No need to keep 100% deposits

• Keep a fixed %age as deposit and use rest for further loans and investmnets
• Legally reserve upto 10%
• Total bank money is total reserve * required reserve ratio
• Process is known as CREDIT CREATION
MODERN BANKING

• Banks hold 10% of reserves at least

• Reserve ratio is set by Central bank
• M1 = Reserves + Reserve Ratio
• This reserves creates an enormous credit through deposits called credit Creation
• Transferring ones wealth into the Money
CENTRAL BANKING

• Organization that monitors commercial banks

• Control monetary affairs
• establishment in 1920
• During 19th century bankruptcy
• 1913 act for establishment of an organization to supervise working of commercial banks
• Control the credit
• Management of nation’s reserves
• Regulation of currency
DIFFERENCE BETWEEN CENTRAL AND
COMMERCIAL BANKING
• CENTRAL BANKING
• Public interest
• Don’t provide services to public
• Overall general banking
• CMERCIAL BANKING
• Profit earning
• Provide customer services to public
• Only own banking
BASIC GOALS OF CENTRAL BANK

• Economic stability
• Inflation control or price stability
• Recession or depression
• Output
• Exchange rate stability
STRUCTURE

• Board of governers
• Regional banks
• Head quarters
• Economists and bankers
• Decision making
CENTRAL BANK WORKING

• Definition
• A central bank is a government organization primarily responsible for the monetary affirs of the
economy
• FUNCTIONS
• Conducting M.P
• Financial stabilization
• Supervising banks
TOOLS

• Reserve ratio
• Interst rate
• Control of credit
• Open market operations
MONETARY POLICY

• Tools
• MS , I
• In depression; expansionary, loose money MS increase i decrease
• In inflation or boom; contractionary tight money MS decrease i increase
• Implication ultimately leads to a balanced growth and mainatined output