Business Environment, 1st Edition by Pearson

Chapter 42: Commercial Banking | 545 |

Limitations

From the account of the credit creation given above, it is clear that

the banks reap where they have not sown. They advance loans or

buy securities without actually paying any cash. The banks make

profi t on the basis of credit creation. However, it must be remem-

bered that the banks cannot go on expanding credit indefi nitely. In

their own interest, they have to apply the brake. They do actually

apply the brake because they know by experience that it is danger-

ous to attempt credit expansion beyond a certain limit. The overrid-

ing limitations arise out of their obligations to meet the demand of

their depositors.

Benham has pointed out three main limitations on the powers of

the banks to ...