Introduction

A lot of misconceptions exist about the regulations that control the behavior of Federal Reserve member banks. What limits the growth of bank deposit liabilities^*? What limits the amount of notes that banks can acquire? And what happens to "loan losses?" And, finally, how do these different limitations interact.

A number of factors influence the behavior of Federal Reserve member banks—these factors include the large number of bank regulations. In this presentation I would like to address questions about three interrelated factors.

^*Throughout this presentation I refer to “deposit liabilities” where many would use the term “deposit.” In the modern banking system banks generally do not accept what we formerly referred to as deposits. They create deposit liabilities in exchange for either cash or the transfer of Federal Reserve deposit liabilities from the bank upon which a check is drawn.