Commercial Banks and the Central Bank — Part 1: Commercial Banks and Credit Creation: visual lesson, ISC Class 12 Economics

Lesson

Commercial Banks and Credit Creation

Part 1 — what commercial banks do, how they create credit, and what limits that power.

In this lesson you will

Explain the primary and secondary functions of commercial banks, with types of deposits and loans
Calculate total deposits and credit created from an initial deposit and a reserve ratio
Explain the limitations of credit creation and the meaning of high-powered money

Part 1 at a glance

Diagram

Primary and secondary functions

Two primary functions define a bank; secondary functions add services.

Concept

Demand deposits (current, savings) can be withdrawn any time; time deposits (recurring, fixed) are kept for a period and earn more.

Table of four kinds of bank deposits: current deposits allow unlimited withdrawals and usually pay no interest, suiting traders; savings deposits pay modest interest; recurring and fixed deposits are time deposits paying higher interest and withdrawn at maturity
Deposit	Withdrawal	Interest	Suits
Current (demand)	Any number of times, by cheque	Usually none	Traders and firms
Savings (demand)	Some limits may apply	Modest	Households
Recurring (time)	At maturity	Higher	Regular small savers
Fixed (time)	After the fixed period	Highest	Lump sums not needed for a while