knowverseSarah deposits one thousand dollars into her bank account, and the institution keeps a small fraction as cash while lending out the rest. This lending process turns a single deposit into digital money across the broader economy.
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Banks act as financial intermediaries, placing idle savings to work by moving them to people who can use them productively.
Instead, the bank acts as a financial intermediary, a middleman that connects people who have extra money with people who need to borrow it.
From the Knowverse course text.
The reserve requirement is the legal percentage of deposits that banks must keep in reserve rather than lend out.
The law requires banks to keep a specific percentage of every deposit on hand, known as the reserve requirement.
From the Knowverse course text.
With a 10% reserve requirement on a $1,000 deposit, the bank keeps $100 as a cash buffer.
If the reserve requirement is 10%, the bank must keep $100 of Sarah's deposit in its vault or at a central location.
From the Knowverse course text.
Excess reserves are the funds left over after accounting for the reserve requirement, which banks lend out for interest.
The money the bank chooses to lend out to earn interest is called excess reserves.
From the Knowverse course text.
Banks create new money when they lend out reserves, establishing digital balances that borrowers can spend.
This act of lending creates new money in the form of digital deposits.
From the Knowverse course text.
Because banks must retain a percentage of each deposit as reserves, the amount available to lend shrinks with each cycle.
No. Because of the reserve requirement, each new loan is smaller than the one before it.
From the Knowverse course text.
Sarah retains full access to her $1,000 balance while the borrower spends the newly created loan funds.
Sarah still has $1,000 in her account. She can spend it whenever she wants.
From the Knowverse course text.
A bank run occurs when worried depositors flood a bank to withdraw their cash before the vault runs out.
A local bank in a busy town suddenly faces a crowd of worried depositors who all want their cash immediately.
From the Knowverse course text.
Deposit insurance protects individual savings so that panic lines and bank runs never form.
Because people know their money is safe, the long lines never form in the first place, and the bank run is prevented.
From the Knowverse course text.
The FDIC covers traditional banking products like checking accounts, savings accounts, and certificates of deposit.
No. The FDIC only covers traditional banking products like checking accounts, savings accounts, and certificates of deposit (CDs).
From the Knowverse course text.
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Banks act as financial intermediaries by connecting savers with borrowers, but they cannot lend out every single dollar entrusted to their care. The institution must maintain a specific cash buffer to satisfy daily withdrawal requests from account holders who need physical money.
The law requires banks to keep a specific percentage of every deposit on hand, known as the reserve requirement. If the reserve requirement is ten percent, the bank must keep one hundred dollars of a one thousand dollar deposit in its vault while the rest becomes excess reserves.
The law requires banks to keep a specific percentage of every deposit on hand, known as the reserve requirement.
From the Knowverse course text.
When a borrower takes the excess reserves to purchase equipment, that money enters circulation and gets deposited into another bank account. Because the reserve requirement applies to each new deposit, every subsequent loan created in the system becomes smaller than the one before it.
This continuous cycle allows an initial deposit to grow into a much larger amount of total digital spending power throughout the economy. Banks create this deposit money through the lending process rather than printing physical currency in their vaults.
As this cycle continues, the original $1,000 deposit grows into a much larger amount of total spending power throughout the economy.
From the Knowverse course text.
Because banks keep only a fraction of their total deposits as physical cash, a sudden rush of worried customers demanding withdrawals can create a severe crisis. This event is known as a bank run, and it can quickly drain the vault and destroy even a healthy financial institution.
To prevent these panics from spreading, governments established central banks to act as lenders of last resort during emergencies. The central bank provides emergency loans to keep doors open and enforces strict regulations to ensure commercial banks manage risk responsibly.
A local bank in a busy town suddenly faces a crowd of worried depositors who all want their cash immediately.
From the Knowverse course text.
Sources: Money and the Banking System. Each question or step includes an excerpt from the course.
