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    Managing Credit Risk and The Determinants of The Money Multiplier

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    RoselleFayeGarciaTupa
    The document discusses three main topics: 1. The biggest risk banks face is large, unexpected deposit outflows due to inflation. Banks must implement liquidity management measures to maintain balance between cash on hand and outflow demands. 2. Requiring collateral and compensating balances from borrowers is an important credit risk management strategy. It provides protection for both the lender and borrower in case of default. 3. There are three key determinants of the money supply: reserve ratio, currency holdings, and excess reserves. The money multiplier formula shows that changes in currency holdings have the biggest effect on the money multiplier compared to changes in excess reserves.

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    Managing Credit Risk and The Determinants of The Money Multiplier

    Uploaded by

    RoselleFayeGarciaTupa
    11 views2 pages
    The document discusses three main topics: 1. The biggest risk banks face is large, unexpected deposit outflows due to inflation. Banks must implement liquidity management measures to maintain balance between cash on hand and outflow demands. 2. Requiring collateral and compensating balances from borrowers is an important credit risk management strategy. It provides protection for both the lender and borrower in case of default. 3. There are three key determinants of the money supply: reserve ratio, currency holdings, and excess reserves. The money multiplier formula shows that changes in currency holdings have the biggest effect on the money multiplier compared to changes in excess reserves.

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    The document discusses three main topics: 1. The biggest risk banks face is large, unexpected deposit outflows due to inflation. Banks must implement liquidity management measures to maintain balance between cash on hand and outflow demands. 2. Requiring collateral and compensating balances from borrowers is an important credit risk management strategy. It provides protection for both the lender and borrower in case of default. 3. There are three key determinants of the money supply: reserve ratio, currency holdings, and excess reserves. The money multiplier formula shows that changes in currency holdings have the biggest effect on the money multiplier compared to changes in excess reserves.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    11 views2 pages

    Managing Credit Risk and The Determinants of The Money Multiplier

    Uploaded by

    RoselleFayeGarciaTupa
    The document discusses three main topics: 1. The biggest risk banks face is large, unexpected deposit outflows due to inflation. Banks must implement liquidity management measures to maintain balance between cash on hand and outflow demands. 2. Requiring collateral and compensating balances from borrowers is an important credit risk management strategy. It provides protection for both the lender and borrower in case of default. 3. There are three key determinants of the money supply: reserve ratio, currency holdings, and excess reserves. The money multiplier formula shows that changes in currency holdings have the biggest effect on the money multiplier compared to changes in excess reserves.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
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    Managing Credit Risk and the Determinants of the Money Multiplier

    Sentence count: 5
    1. In my opinion, the biggest risk that banks face these days is the unusual large unanticipated
    deposit outflows. It is because, due to inflation, people nowadays would withdraw their savings
    in banks and use it in other necessities. Banks are not used to this situation so they have trouble
    in maintaining a sound balance between cash on hand and the outflow demands. Banks should
    be able to impose proper liquidity management measures which may include acquiring assets
    that are easily convertible to cash. It should be done so that they'll be able to feed both deposit
    withdrawals and demand payments.

    Sentence count: 5
    2. From the five guiding principles for managing credit risk, I choose having 'Collateral and
    Compensating Balance Requirements' as one of the most important guide. It is because if the
    borrower defaults or cannot pay his/her obligation anymore, then the collateral, or the property
    that is promised to be given to the lender is a good compensation already for the losses suffered.
    Another advantage is that with the compensating balance required, the lender or the bank can
    still buffer their losses with the currently deposited amount of compensating balance. Of the
    disadvantages I see is that, this kind of arrangement may not attract many borrowers due to the
    strict and high-demanding collateral and compensating balance required. Nevertheless, this
    guide gives both parties the protection they both need.

    Sentence count: 7
    3. First off, there are at least three factors that determine the money supply and they are the
    following: reserve ratio, currency holdings and excess reserves. Reserve ratio can be defined as
    a part of the reserve liabilities that the bank must hold and not lend out or invest. Meanwhile
    currency holdings are currencies kept in large amounts as a part of a foreign exchange reserve.
    Lastly, excess reserves are capital reserves kept in excess of what is required by law, creditors
    and other internal controls.

    The money multiplier formula shown on the left


    shows the effect of currency holdings and excess
    reserves. The first formula is the base sample,
    meanwhile the formula on the lower left hand
    corner shows the effect of increasing the currency
    holdings while the right one shows the effect of
    increasing the excess reserves. It can be seen that
    currency holdings being on both the numerator
    and denominator of the formula gives the biggest
    effect on the multiplier while the excess reserves
    just gives a minute change to the money multiplier since it only appears on the denominator side
    of the formula.

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