Bank lending and liquidity creation

University / Undergraduate
Modified: 30th Apr 2020
Wordcount: 313 words

Disclaimer: This is an example of a student written assignment. Click here for sample essays written by our professional writers.
Any opinions, findings, conclusions or recommendations expressed in this material are those of the authors and do not necessarily reflect the views of UKEssays.ae.

Cite This

Question

What are the links between credit creation and liquidity creation by banking institutions?

Answer

The primary function of banks is to create credit and ensure the flow of money through the processes of loans, investments, and advances. The commercial banks usually operate in a cycle where they have the power to lend money which is deposited and hence multiply the amounts of investments, loans, and deposits as well. They are able to create additional purchasing power through this credit, which means that an increase in bank credits lead to multiple banking deposits. Commercial banks are the secondary source of money supply, as credit creation is their main functionality while the central bank has the responsibility of circulation of money in the economy, hence creating liquidity. Therefore, commercial banks are required to keep cash reserves with the central bank to ensure a smooth flow of liquidity for depositors. Commercial banks create credit by two primary methods: by giving a loan and by purchasing securities. As such, a borrower who asks for a loan of £1000 would be credited with this amount in their account rather than giving them cash. The borrower then draws the cheques and those who receive the cheque amount, deposit the amount in their respective banks, thus creating more deposits. Further, when the person deposits this £1000 in their account, the bank only keeps a particular percentage of that amount as cash for day-to-day transaction while lending the remaining to further clients. Similarly, when a bank purchases securities or even buys some assets, it simply credits the account of the sellers with that amount, thus creating deposits. Regardless of the fact that deposits are made in some other banks, it enhances the banking system deposits overall and stimulates the liquidation process.

References

 

Cite This Work

To export a reference to this article please select a referencing style below:

Give Yourself The Academic Edge Today

  • On-time delivery or your money back
  • A fully qualified writer in your subject
  • In-depth proofreading by our Quality Control Team
  • 100% confidentiality, the work is never re-sold or published
  • Standard 7-day amendment period
  • A paper written to the standard ordered
  • A detailed plagiarism report
  • A comprehensive quality report
Discover more about our
Assignment Writing Service

Essay Writing
Service

AED558.00

Approximate costs for Undergraduate 2:2

1000 words

7 day delivery

Order An Essay Today

Delivered on-time or your money back

Reviews.io logo

1858 reviews

Get Academic Help Today!

Encrypted with a 256-bit secure payment provider