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Unit 20 — The Banking System

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Purpose:

To help viewers understand the key role of banks in the U.S. economy and how government agencies act to try to prevent individual bank failures from becoming banking crises.

Objectives:

  1. Banks play a key role in the economy by holding deposits, handling withdrawals, and making loans.

    1. Banks only need a small fraction of their deposits in cash to handle withdrawals.
    2. Banks are forced by banking regulations to hold a certain percentage of their deposits as reserves.
  2. A balance sheet tallies a bank’s assets and liabilities.

    1. Cash and loans are the primary assets.
    2. Deposits are the primary liabilities.
  3. The banking system can expand the amount of money in circulation by making loans.

    1. The amount of the expansion is limited by the reserve ratio.
    2. During depressions deposit contraction takes place.
  4. Various government agencies regulate banks and are able to reduce the risk of bank failure—in theory, though not always in practice.

    1. The Federal Reserve acts as a lender of last resort.
    2. The FDIC insures the deposits of some banks.
    3. Regulators examine banks’ books in order to prevent excessively risky
 bank practices—they don’t always succeed.

Audio and Transcripts

Meet the Series Experts

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Henry Kaufman

Henry Kaufman

President of Henry Kaufman & Company Inc., which specializes in financial and economic counseling as well as investment management.

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Steven Pearlstein

Steven Pearlstein

Pulitzer Prize–winning journalist and business and economics columnist for the Washington Post, cited for “his insightful columns that explore the nation’s complex economic ills with masterful clarity.”

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Karen Petrou

Karen Petrou

Co-founder and Managing Partner of Federal Financial Analytics, Inc., a privately held company that provides analytical and advisory services on legislative, regulatory, and public-policy issues affecting financial services companies doing business in the U.S. and abroad.

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Peter Wallison

Peter Wallison

Arthur F. Burns Fellow in Financial Policy Studies at the American Enterprise Institute (AEI) and Co-Director of AEI’s program on financial policy studies, specializing in banking, insurance, and securities regulation.

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WHAT’S YOUR
ECONOMICS IQ?

  1. All of the following would be considered money, narrowly defined, EXCEPT:

    savings accounts.

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  2. The TWO PRIMARY functions of commercial banks are to:

    hold demand deposits and make loans.

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  3. The liabilities of a commercial bank include:

    demand deposits.

    NEXT QUESTION

  4. The assets of a commercial bank include:

    loans.

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  5. Public confidence in the commercial banking system has been strengthened by the fact that:

    nearly all deposits are insured up to $250,000.

    NEXT QUESTION

  6. Most economists today agree that a situation like the panic of 1907 is unlikely to recur. This is MAINLY because:

    for good reason, people have far more faith in banks than they used to.

    RESTART QUIZ

Glossary

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Key Terms