FM 3
FM 3
• From stage 1 to stage 3, total amount of money in the banking system has gone up from
Rs 100 to Rs 180
• Money has “magically” been created
Reserves
• CRR in India
Reserves in Cash • Incremental/Total
Fee Income
Central Bank
Reverse
Repo Banking System
Banking System
Cash Securities
Other Liquidity Adjustment Operations
• Banks have access to
• Borrowing from Central Bank
• Discount Window
• Marginal Standing Facility
• Lending to Central bank
• Standing Deposit Facility
• Note that RBI fixes Repo and Reverse Repo rates: These are policy
rates
• RBI also does variable repo and reverse repo operations to aggressively
manage liquidity
Deposit Insurance
• Bank managers have an incentive to take risky bets
• Their financing comes from deposits that do not want their funds
used this way
• How to manage
• Capital Adequacy & Other regulation
• Glass Steagall
• Deposit Insurance
• DICGC in India – deposits upto Rs 500,000
• FDIC in the US - Deposits up to USD 250,000
• This allows small depositors to be protected
Bank Failures