Money Mechanics in Banks System

The major business that is done by banks is the buying and selling of cash. This is how they make profits hence they are always willing to buy and sell cash to the customers.Advertising We will write a custom essay sample on Money Mechanics in Banks System specifically for you for only $16.05 $11/page Learn More Banks ensure that they transact well so that they can realize profits in the business transactions that they make. Banks always strive to ensure that cash deposits in a day’s transactions exceed withdrawal. Total deposits, which are made by customers in a business day, rarely exceed the total withdrawals by more than one percent. They are often retained at less than one percent. Banks maintain low cash reserves as most of the money is put to active business. Banks sell the money they get from customers to the Federal Reserve. This helps banks to increase their primary reserves (Ashby, pp. 55 -78). To ensure that banks do not misuse the mon ey that is deposited by customers, a banking legislation has been formulated in the US. This legislation demands the banks to have required reserves in order to avoid utilizing the money belonging to their customers in business. The required minimum amount of money in the primary reserve of banks does not include the deposit balances of customers. Reserve requirements are set at a certain percentage. Banks are thus expected to deduct this set percentage of the money deposited and add it to primary reserve. However, a bank may choose to hold an amount of money exceeding the minimum required in the primary reserve. The bank can raise its primary reserves by including both the required reserves and the additional amount referred to as the working reserve (Ashby, pp. 55 -78).Advertising Looking for essay on business economics? Let's see if we can help you! Get your first paper with 15% OFF Learn More Banks gain substantially from the net deposits whiles they lose from net withdrawals. Net withdrawals have negative impacts on the reserves. Preventing net withdrawal is hard thus banks use the working reserve to offset the gap created by net withdrawal. Working reserves help to cushion banks from the insufficient reserve position which results from continued net withdrawals (Ashby, pp. 55 -78). Banks in the US raise their revenues in two major ways. They raise revenue through levying service charges on the accounts of their customers. Banks also raise revenues from excessive reserves. This is the major source of revenues for banks. The excessive reserves are invested in buying Treasury securities that are deemed to be safe and yield interest revenues. Treasury bonds are also referred to as secondary reserves. Secondary reserves support the primary reserves in yielding revenues for banks (Ashby, pp. 55 -78). Banks also generate revenues from lending money to its customers. Banks only lend money from their excessive reserves. The supply of money in the b ank is enhanced by lending activities. Banks are comfortable to lend money when they have excess reserves. Banks are extremely cautious when lending to customers. They usually limit their lending to an amount which does not exceed the excessive reserve. The lending activities in banks take place in cycles.Advertising We will write a custom essay sample on Money Mechanics in Banks System specifically for you for only $16.05 $11/page Learn More Interest rates that are charged on the loans borrowed by customers affect the loan expansion process. The level of interest rates by banks impacts on the availability of the excess bank reserves and the willing borrowers (Ashby, pp. 55 -78). Banks avail loans when they have excessive reserves. Federal reserves are acquired from four major sources. These are: the purchasing of outstanding Treasury securities or bonds, reduction of the reserve requirements by banks, the net deposits of paper currency and coins by cus tomers and the choice of banks of operating with secondary reserves. Banks can choose to work with insignificant working reserves. This means that firms accept the risk of net withdrawals. In such cases, banks can transfer money into their working reserves. The regulatory legislation also allows banks to sell the Treasury bonds to raise excessive reserves (Ashby, pp. 55 -78). The loss of excessive reserves limits the lending exercise by banks. Banks loose excessive reserves through selling its treasury bonds, rise in reserve requirements by banks, net cash withdrawals and decisions to work with secondary or large working reserves. In general, the cash deposits made by customers allow banks to increase their lending. However, net withdrawals reduce the rates of lending by banks (Ashby, pp. 55 -78).Advertising Looking for essay on business economics? Let's see if we can help you! Get your first paper with 15% OFF Learn More Works Cited Ashby, David B. Money Mechanics. 2009. Web. This essay on Money Mechanics in Banks System was written and submitted by user Stella Horne to help you with your own studies. You are free to use it for research and reference purposes in order to write your own paper; however, you must cite it accordingly. You can donate your paper here.