A great number of regulations exist that dictate the behavior of Federal Reserve member banks. In this presentation I will address three important questions regarding the regulation of bank behavior:

1. What limits the growth of bank deposit liabilities? Why can’t banks increase “deposits” indefinitely?
2. What limits the amount of notes that any bank can acquire? Why don’t banks make more “loans,” even with strong demand?
3. What effect do “bad loans” have on these limits? Who absorbs losses when customers default on their notes?

 

In the rest of this presentation I will address these three questions.