[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

Table 28.3
AMERICABANK BALANCE SHEET
Assets
Liabilities
Loans outstanding $28 million Deposits $30 million
Government bonds $ 2 million
Reserves $ 3 million Net worth $ 3 million
Total $33 million Total $33 million
with a look at the assets and liabilities of a typical bank. One convenient way to look
at the assets and liabilities of a bank (or a firm or individual, for that matter) is to organize
them in what is known as a balance sheet. A balance sheet simply lists all the
assets of the bank in one column and the liabilities in a second column.
The assets of the bank are what the bank owns, including what is owed to it by
others. Since the loans that the bank has made represent funds that the borrowers
owe the bank, loans are listed as assets on the bank’s balance sheet. Liabilities are
what the bank owes to others. We can think of the bank’s depositors as having lent
money to the bank. That is why deposits are treated by the bank as liabilities.
Table 28.3 shows the balance sheet of a typical bank that we will call AmericaBank.
Its assets are divided into three categories: loans outstanding, government bonds,
and reserves. Reserves are the deposits the bank has not used to make loans or buy
government bonds. The cash a bank keeps in its vault to meet daily business needs
is one part of its reserves. Another part is kept in an account elsewhere. In the United
States, the Federal Reserve acts as a bank for banks, and private banks that are
members of the Federal Reserve System can have accounts with the Fed. The bank’s
riskiest assets are its loans outstanding. These consist of loans to business firms,
real estate loans (mortgages), car loans, house-remodeling loans, and so on.
Government bonds are more secure than loans to households or firms, and banks typically
concentrate their holdings in Treasury bills (or T-bills)—short-term bonds
maturing in thirty, sixty, or ninety days after their date of issue. 3 Most secure are
the reserves that are held on deposit at the local Federal Reserve bank and the cash
in the vault.
The amount of money that people need to set aside for emergencies depends (in
part) on how easily they can borrow. The same is true for banks. If they can borrow
easily from other banks to meet any shortfall, they need to keep very little in their
reserves. In the United States, the Federal Reserve banks act as the banker’s bank,
lending money to other banks. (Banks do not, however, have an automatic right to
borrow; the Fed must concur with the request. Many central banks use this discretionary
power to steer private banks’ behavior.) But unlike individuals, banks are
3 Long-term bonds are volatile in price, because their price changes with changes in interest rates. By instead
holding short-term government bonds, the banks avoid risk, since price changes are much less likely over
relatively short periods of time.
CREATING MONEY IN MODERN ECONOMIES ∂ 621