What Is A Bank Multiplier

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What Is A Bank Multiplier
What Is A Bank Multiplier

Video: What Is A Bank Multiplier

Video: What Is A Bank Multiplier
Video: The Money Multiplier 2024, November
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Against the backdrop of crises and surges in the value of currencies, ordinary citizens have become increasingly interested in the mechanisms of making a profit, the principle of functioning of financial institutions. What is a banking or money multiplier - this question is now being asked not only by economists, but also by ordinary modern inhabitants.

What is a bank multiplier
What is a bank multiplier

The growth of the money supply is one of the assets of the modern economy. It occurs not only as a result of the active work of printing presses, but also against the background of financial operations of banks, for example, attracting customers, their deposits, issuing loans, which are the basis of bank multipliers. What it is, how they can be used to increase the profits of ordinary citizens and legal entities, how they work and what their principle is based on - these nuances are increasingly of interest to ordinary depositors and borrowers of banks.

The concept and essence of the banking multiplier

In countries with market-based economies, as in Russia, a two-tier banking system operates - the central bank and commercial financial institutions under its control. The central bank regulates the mechanism for increasing the money supply with the help of a coefficient determined by it. Regulation is carried out by tracking reserves at each of the levels.

In simple terms, a bank multiplier is a coefficient expressed in a numerical value. It can be used when performing the following banking operations:

  • receiving and processing deposits,
  • issuing loans,
  • buying or selling currencies,
  • investing part of the reserve in production or trade.

That is, any turnover of the money supply from the total reserve of a central or commercial bank that brings this or that type of income is a determinant of the banking multiplier.

Banking multiplier types

Banking multiplier can be credit or deposit. The deposit ratio (multiplier) of the money supply, in essence, reflects the number of transfers of the same amount from one account to another over a certain time period. Its value depends on how effectively the monetary reserve is used by a particular financial organization against the background of a certain economic situation - both global and within the state. It is the deposit banking multiplier that reflects the efficiency of a particular bank, allows you to attract new customers and expand credit services.

Bank credit multiplier (coefficient) reflects the ratio of loans issued and funds raised to the accounts of a particular financial institution (bank). In addition, the indicator determines the lower threshold for the cost of a loan, that is, its interest rate, indicates the bank's ability to earn independently, to increase its reserve.

The role of the bank multiplier in the economy

The word “multiplier” itself reflects its meaning in the economy of any country - from Greek it is translated as “multiplier”. But this does not mean that the scheme allows an unlimited increase in the money supply. Bank multiplier (ratio) allows you to track

  • the degree of impact of investments (investments) on profitability,
  • the level of influence of certain contributions on the economy,
  • the effectiveness of central bank policies.

The bank multiplier can be both an incentive for economic growth and a certain deterrent. Stimulation occurs when the tax base of the economy is normalized, the level of imports decreases and export supplies increase.

The banking multiplier is inextricably linked with the reserves of financial structures. The money supply in circulation and available for disposal at a given time period must necessarily be regulated by the central bank. The banking multiplier, which is an indicator of the efficiency of the economy, is formed from liquid assets and their successful disposal.

Only the Central Bank of Russia has the ability to adjust the banking multiplier, since this indicator is a mechanism for expanding and limiting the functionality of commercial banks operating in the state.

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