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Money Destruction
Banks create and destroy money through "fractional reserve banking." Depositors leave money with the bank in return for interest payments. Since most depositors don't actually withdraw most of their deposits at any given time, the bank can lend most of the depositors' money out, keeping only a small fraction of all deposits on hand as a reserve available for withdrawals by depositors. The total amount of money in existence thus increases with each new loan.
When a depositor withdraws money from a bank, the bank is obligated to pay any amount up to the entire amount on deposit, even though the bank holds only a fraction of the deposit in reserve. The bank must use fractions of other depositors' money to make up the difference. This means that the ratio of reserves to total deposits shrinks every time a withdrawal is made. The law prescribes a minimum reserve ratio; if the bank's actual ratio approaches this amount, the bank must either call in loans, which damages its business relationships, or borrow money from another bank or from the central bank to maintain its reserves at the required level. This effectively destroys money, since the overall amount of deposits in the banking system is decreased. In practice, the withdrawn money will likely quickly be spent and re-deposited at another bank, evening out the process over time. Money is also destroyed by a loan default. The bank accounts the loan as an asset, something that will eventually satisfy deposits, which are liabilities of the bank. When no repayment is forthcoming, the asset is destroyed, the bank takes a loss, and the bank must make other arrangements to satisfy deposits, as above.
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∙ 13y ago
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How bank create money?
Money is CREATED by governments, not banks. They store money. Banks also EARN money by loaning money to people. People pay the banks back more money than they borrow (interest)
Do banks iron money?
Banks do not iron money as this would burn it. The Royal Mint, who make the money, make it flat when it is made, and then send it to the banks like this. Ironing money is not recommended :)
Why do banks give interest on deposit?
Banks make money by lending money to people and charging people for borrowing. The amount banks charge is called interest. Banks borrow money from other people and pay them interest on the amount borrowed. Banks charge more interest on the money they lend than they pay one the money they borrow. That is how they make money. When people deposit money with a bank, the bank is literally borrowing money from some people so they can lend it to other people. That is why banks pay interest.
Commercial banks and their relationship with the reserve bank?
we take/borrow money from the commercial banks and the commercial banks take/borrow money from the reserve bank
What banks are often called full service banks because of their many services?
Banks that have money.
How did Andrew Jackson destroy the Second National Bank?
He ordered the Treasury to put the money in state banks.(:
How bank create money?
Money is CREATED by governments, not banks. They store money. Banks also EARN money by loaning money to people. People pay the banks back more money than they borrow (interest)
Do banks iron money?
Banks do not iron money as this would burn it. The Royal Mint, who make the money, make it flat when it is made, and then send it to the banks like this. Ironing money is not recommended :)
Is it okay to destroy money?
No. Destroying money is an illegal, it means against the law to destroy money.
What did Jackson try to destroy because he thought it was an agent of the wealthy?
Banks
How do banks use money?
they use money for money
Are banks out of money?
no
Who lend money?
Money lenders and banks.
How does bank earn profit?
The way banks earn money is basically a two-step process. First, banks borrow money from other banks as well as from their depositors. The banks then loan that money out to businesses and people, and charge them a higher rate of interest than they are paying on the money. Banks also earn money by charging fees for services they offer.
Why do banks give interest on deposit?
Banks make money by lending money to people and charging people for borrowing. The amount banks charge is called interest. Banks borrow money from other people and pay them interest on the amount borrowed. Banks charge more interest on the money they lend than they pay one the money they borrow. That is how they make money. When people deposit money with a bank, the bank is literally borrowing money from some people so they can lend it to other people. That is why banks pay interest.
How banks work?
Banks take your money and buy mcdonalds
Why banks have not eliminated the need for the money markets.?
Banks ARE the money markets. They are hardly likely to eliminate themselves.
