6.(Money Creation) Show how each of the following would initially affects a banks assets and liabilities.
What following?
To show how each of the following factors would initially affect a bank's assets and liabilities, we need to understand the basic concept of a bank's balance sheet. In a bank's balance sheet, assets represent what the bank owns, and liabilities represent what the bank owes.
1. Increase in Customer Deposits:
When customers deposit money into a bank, it increases the bank's liabilities. This is because the bank owes that money to the customers. The bank's assets also increase because it holds the deposited money as cash or balances in reserve accounts.
2. Loan Disbursement:
When a bank issues a loan to a borrower, it increases the bank's assets. The loan amount becomes an asset since it represents the bank's expectation of receiving the principal amount plus interest over time. On the liabilities side, the bank's reserves may decrease if it uses some of its existing funds to disburse the loan. Additionally, the borrower might open a new account with the bank, which would increase the bank's liabilities.
3. Central Bank Injection of Funds:
If the central bank injects funds into a bank, it increases the bank's assets. The bank receives the injected funds as reserves, which increase its cash holdings and balances in reserve accounts. On the liabilities side, there may be no change unless the bank uses the injected funds to create new loans or issue liabilities like bonds or debentures.
4. Sale of Securities:
When a bank sells securities, such as government bonds or corporate bonds, it decreases its assets. The bank no longer holds these securities, so they are no longer an asset. On the liabilities side, there may be no immediate change unless the bank decides to use the funds from the sale to create new loans or pay off its liabilities.
5. Non-Performing Loans:
If a borrower defaults on a loan, it decreases the bank's assets. The bank expected to receive payments from the borrower as an asset, but if the loan becomes non-performing, the bank has to write off the loan amount or recognize the loss. However, on the liabilities side, there is no immediate change unless the bank decides to increase its reserves in response to the loss.
Remember, these are initial effects, and there can be further implications and adjustments to a bank's assets and liabilities over time due to factors such as interest earned or paid, loan repayments, bank fees, and so on.