START
Reserves
Loans
Gov't securities
Total Assets
100 Deposits
500
400
1000 Total Liabilities
1000
1000
required reserve ratio = 10%, bank holds no excess reserves
SCENARIO: New deposit by bank customer of 200
Reserves
Loans
New Loans
Gov't securities
Total Assets
120 Deposits
500
180
400
1200 Total Liabilities
1200
1200
Deposits increase by 200; required reserves increase by 20 (10%);
New loans created (200 - 20 = 180)
New loans then become a new deposit at another bank and the
multiple deposit multiplier continues.
SCENARIO: What if new loan of 180 above is extended to existing bank
customer (i.e. new loan isn't deposited at another bank but same
bank)?
Reserves
Loans
New Loans
Gov't securities
Total Assets
138 Deposits
680
162
400
1380 Total Liabilities
1380
1380
Answer: the same process unfolds whether the new loan is deposited
at the existing bank or at a new bank.
Deposits increase by 180; required reserves increase by 18;
New loans created (180 - 18 = 162).
SCENARIO: The Fed buys bonds directly from a private individual.
That person gives up the bond and receives a payment from the Fed.
That person will likely then deposit the payment into a bank and the
multiple deposit process is started as outlined above.
SCENARIO: The Fed buys bonds directly from a bank.
Example: Fed buys 100 bond from bank.
Reserves
Loans
Gov't securities
Total Assets
200 Deposits
500
300
1000 Total Liabilities
1000
1000
The bank gives up the bond in exchange for reserves.
The bank now has excess reserves because nothing has happened
to deposits.
The bank will extend a new loan and the multiple deposit process
is started again.