Commercial and Central Banks: Functions and Balances

Functions of Commercial Banks

• Mediator between savers and borrowers.
• Creation of money: They can open deposit accounts for customers or allow the provision of checks exceeding the amount deposited.
• Safety: Operators can deposit their savings in the bank as legal money to protect it from loss and theft.

Balance of Commercial Banks

• Assets: Resources and rights
• Liabilities: Funding sources and debt

Assets

Cash Reserves

• Cash (legal tender) and Central Bank deposits: E = cc ¹, DV

Earning Assets

• Credits: Typical operations of the banks.
• Stock portfolio: Public funds, bonds, and stocks.

Real Assets

• Buildings, property, real estate, equipment, and facilities.

Liabilities

Customer Funds and Liabilities

• Demand deposits (Dv) of savings and term.
• Central Bank loans (PBC)

Own Resources or Net Worth

• Capital and reserves

Functions of the Central Bank

Monetary

• Creation of legal money (monopoly).
• Regulate and control the creation of deposit money.

Non-Monetary

• State Bank teller: Centralized collection and payment of all units. It lends in the short and long term.
• Gold and foreign exchange reserve.
• Bank of banks: Maintains part of the commercial banks' reserve accounts. It gives loans to banks and offsets operations among banks.
• Financial advice.

Central Bank Balance

• Assets: Resources and rights
• Liabilities: Funding sources and debt

Assets

• Foreign reserves: Gold and currency.
• Portfolio securities.
• Loans to the Public Sector: Credits to any of the agencies, securities, and public accounts of the Treasury.
• Loans to commercial banks (PBC).
• Real Assets: Buildings, property, real estate, equipment, and facilities.

Liabilities

Monetary Liabilities

• Monetary Base (WB): Total lawful money issued: BM = E + Dlmp
• Readily available cash in the hands of the public (Dlmp).
• Cash reserves of commercial banks (E).

Non-Monetary Liabilities

• Deposits Treasury.
• Capital.
• Reserves.

The Creation of Legal Money

To put money into circulation, the Central Bank may:

• Purchase any assets in the market (open market operations).
• Give credit to commercial banks.
• Reduce the reserve ratio of commercial banks.

To destroy money, the Central Bank can perform these operations.