4. Leverage
1. I have 10
2. I borrow 90 from you
3. I buy something for 100
4. I resell the item for 150
5. I pay back your 90
6. I keep the 60
7. I earned 50 profit on my 10
6. Bank Balance Sheet
Assets
Liabilities and
Owner Equity
Reserves 200 Deposits 800
Loans 700 Debt 150
Securities 100 Capital 50
Total 1000 Total 1000
Totals must balance or be equal
7. What is the leverage ratio?
Assets
Liabilities and
Owner Equity
Reserves 200 Deposits 950
Loans 800 Capital 50
Total 1000 Total 1000
Assets ÷ Capital
1000 ÷ 50 = 20
18. SAMA Official Repo Rate
Dropped from
5.5% October 2008
to 2.0% by January 2009
3 month period of
global financial crisis
Rate increased
as economy
heated up
24. Bank Run
Customers all want their
money at the same time
Many banks runs at once
Bank Panic
25. Quiz 5 Name______________ ID_________
1.What is financial leverage?
2. How do you calculate a bank’s leverage?
3.What are the three tools that SAMA can use to manage the money supply?
4. If SAMA buys bonds, what happens to the money supply?
5. If SAMA lowers the ORR what happens to the money supply?
6. If SAMA lowers the reserve requirement what happens to the money supply?
7. Does deposit insurance make bankers more or less risky?
35. The Meaning of Money
Three Functions of Money
Medium of Exchange
Unit of Account
Store ofValue
Two Kinds of Money
Commodity
Fiat
Money in the Economy
Currency
Demand Deposits
Central Banks
SAMA
Banks and the Money Supply
100-Percent Reserve Banking
Fractional-Reserve Banking
Reserve Ratio
Money Multiplier
Leverage
Capital Requirement
Tools of Monetary Control
Open-Market Operations
Discount Rate - ORR
Reserve Ratio
Bank Runs and Deposit Insurance