Financial Markets, Banking, and Monetary Policy

CHAPTER 3 The Special Role of Commercial Banks

WHAT YOU WILL LEARN IN THIS CHAPTER

• The key components of commercial bank balance sheets.
• The central role of commercial banks in the payment system and the evolution of payment media, including the variety of electronic payment methods available today.
• Important features of the payment system infrastructure.
• The difference between a debit card, credit card, and stored value card.
• The dominant role of commercial bank deposits in the money stock, which, in principle, can be used by the central bank for conducting monetary policy.
• How banks provide liquidity to the rest of the economy.
• How banks address asymmetric information and determine which deficit units will get funds in the form of loans—and on what terms.
• How banks transform shorter-term deposits into loans with longer maturities.
• Why banks are provided a government safety net and, in return, are subject to more regulation than most other sectors of the economy.

BACKGROUND

Chances are that it has been some time since you have been in the lobby of a commercial bank. Perhaps you have never been. This, however, should not be construed to be reflective of the importance of commercial banks to you and to our economy more broadly. How did you pay for your textbooks this semester or your last tank of gas? Unless you used cash, commercial banks handled the various steps that were involved in those transactions, which resulted in funds being transferred to the account of the seller—either ...