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Financial context of business – I

6.3 Credit creation

 Banks have discovered that at most 10 per cent of the deposited cash will be
withdrawn, thereby leaving the remainder for loans and/or investment.

 This percentage is known as the cash ratio

 Furthermore, when a bank lends money to a borrower, some of that money may
ultimately be deposited back in another bank, providing more cash reserves

 Change in total deposits = multiplier × initial deposit

 Multiplier = 1/ cash ratio

6.4 Role of central Banks

 Banker to other banks

 Banker to the government

– Bank accounts for Government departments

– Raising/redeeming funds and managing the national debt

– Operates monetary policy

– Manages reserves of foreign currency

 Supervises banking system

– Manages capital adequacy and liquidity

– Lender of last resort

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