To know the entire process of cash creation today, why don’t we produce a system that is hypothetical of. We’re going to give attention to three banking institutions in this system: Acme Bank, Bellville Bank, and Clarkston Bank. Assume that all banking institutions have to hold reserves corresponding to 10% of the deposits that are checkable. The amount of reserves banking institutions are required to hold is named needed reserves. The book requirement is expressed as a needed book ratio; it specifies the ratio of reserves to checkable deposits a bank must maintain. Banking institutions may hold reserves more than the level that is required such reserves are known as extra reserves. Extra reserves plus needed reserves total that is equal.
Because banking institutions make fairly little interest on their reserves held on deposit because of the Federal Reserve, we will assume which they look for to put up no extra reserves. When a bank’s excess reserves equal zero, it really is loaned up. Finally, we will ignore assets other than reserves and loans and deposits aside from checkable deposits.