Bank Limitations & Losses
Synopsis of Limits & Losses

In order to pull everything together, let me first summarize the information I have provided so far related to transactions, limitations on some bank activities, and the effect of loan losses.


We have discussed three types of bank transactions two of which affect deposit liabilities and one of which does not. Those transactions consist of:

  1. Increase of deposit liabilities and bank reserves by a transfer into the bank.
  2. Increase of deposit liabilities for the purpose of acquiring notes for investment.
  3. The purchase (or sale) of securities with the Federal Reserve affects only the reserve account and not deposit liabilities.


We discussed two types of limitations on bank activity: limitations on the expansion of deposit liabilities and limitations on risk asset acquisition. The devices used for limiting these activities can also play interactive roles:

  1. Bank reserve totals limit the deposit making capabilities of a bank.
  2. Capital amounts limit the quantity of risk assets that a bank can acquire.
  3. The interactive limits resulting from reserve balances and capital accounts cause two ways to limit deposit growth.


Loan losses can have an effect not only on the bank and its owners but on larger segments of the economy:

  1. Loan losses come directly out of bank capital.
  2. Reduced bank capital cause a reduction in the capability of banks to acquire risk assets.
  3. Large losses of capital can cause regulators to either sell or liquidate a bank.
  4. Bank failures potential shift deposit liabilities to taxpayers.