Commercial Bank Credit Creation

A commercial bank is a financial institution that provides services such as accepting deposits, giving business loans, mortgage lending, and basic investment products such as savings accounts and certificates of deposit.

Roles of Commercial Banks

Commercial Bank Credit Creation

Bank deposits form the basis for credit creation. Banks accept deposits from the public by opening a deposit account known as the primary deposit. Banks do not hold the money in the account itself and the entire amount is not withdrawn from the account at the same time. So, they advance loans to business people and retain only a small portion of the total deposits in the bank. The Central Bank decides the amount to be held in the form of cash. This is called the cash reserve ratio.

These banks advance loans to business people only against collateral securities. The bank will not give cash but open a derivative account in the name of the individual or institution. Here, the loans create a derivative deposit which is called a secondary deposit or derivative deposit. Thus, the second deposit is called the creation of credit.

Limitations of a Commercial Bank to Create Credit

  • Commercial Bank Credit Creation is based on the primary deposit. Hence, there should be a large amount of cash, but the Central Bank has full control over the cash deposited by the individual. They decide the amount of cash to hold as a reserve and the amount for advancing loans.
  • Business people can avail of loans from the bank only when they have good securities to submit against a loan. If the approved securities are not available to them, then the bank will not be able to create credit as loans.

Also, Read

Finished Reading Commercial Bank Credit Creation? We have more content for you…

Commercial Banks

Primary functions of commercial bank

A commercial bank is a financial institution which provides services such as accepting deposits, giving business loans, mortgage lending and basic investment products such as savings accounts and certificates of deposit. Read more

Elasticity of Demand

The elasticity of demand measures the responsiveness of the quantity demanded a good to a change in its price, price of other goods and changes in the consumer’s income. Read more

Public Revenue

Public revenue refers to the income or earnings of the government of any country. It is very significant for financing developmental programmes such as the construction of roads, railways, schools and hospitals. Read more

Meaning and Functions of Money

Money is a thing which is commonly accepted as a medium of exchange. Money is an instrument which serves as a medium of exchange, a measure of value, a store of value and a standard for deferred payments. Read more

Central Banking

A Central Bank is the apex bank which controls the entire banking system of a country. It has the sole authority to issue notes in that country. It also acts as a banker to the government and controls the supply of money in the country. Read more

Factors of Production

Factors which are used to carry out the process of production are called factors of production. In the modern economy, economists classified these factors into two categories. Read more

Theory of Supply

The supply of a commodity is the quantity of the commodity that producers desire to sell to consumers. Thus, it is the desired flow. It indicates how much firms are willing to sell per period of time and not how much they actually sell. Read more

What is Public Debt?

When the planned expenditure of the government exceeds its total revenue, the government needs to borrow money from individuals and organizations. This is called public debt. Read more

Finished Reading Commercial Bank Credit Creation?

Want to Improve your English Grammar? – Improve now

Discover more from Home of learning

Subscribe now to keep reading and get access to the full archive.

Continue reading

Scroll to Top