Bank Limitations & Losses
Introduction to Our First Bank Example
Banking Introduction

In order to discuss what regulations influence the answers to the three questions posed, we need a hypothetical bank as a model. The image above represents the model bank, which I have dubbed First Bank. Using this diagram I will set up the elements of First Bank that I will refer to in the balance of this presentation.

The left-hand column in the graph represents the amounts of dollars that the bank paid for assets in each of three general categories:

  1. $150,000 in reserves, which amount to the bank’s deposit balance at the Federal Reserve Bank.

$50,000 in securities, consisting primarily of US government bonds.
$400,000 in notes, representing the future obligations of bank customers to the bank.

The right-hand column of this chart represents the amounts and sources of the money used to acquire the assets of the bank. For this example sources fall into two general categories:

  1. $100,000 in capital, which represents an initial capital contribution of bank owners plus accumulated earnings.
  2. $500,000 in deposit liabilities, which includes both demand and time accounts. [Note: demand and time accounts have been included together because standard practice includes them as components of the money supply.]