Why does the Federal Reserve impose capital requirements on commercial banks?

Solutions

Expert Solution

The Federal Reserve impose capital requirements on commercial banks in order to ensure that the commercial banks have enough amount of capital to sustain operating losses without affecting honouring of withdrawals. Federal Reserve also ensure that the risky investments does not dominate the holdings of commercial banks by imposing capital requirements on them. With some capital requirements, the commercial banks are able to meet liabilities in case of immediate and uncertain withdrawals.

Rahul Sunny answered 1 year ago

Next > < Previous

Related Solutions

Briefly describe why it is important to impose capital requirements to commercial banks. What are the...

Briefly describe why it is important to impose capital requirements to commercial banks. What are the current capital requirements in the U.S.? Explain what Basel Accord is.

Why does the Federal Reserve require commercial banks to have reserves? Explain why reserves are an...

Why does the Federal Reserve require commercial banks to have reserves? Explain why reserves are an asset to commercial banks. What are excess reserves? How do you calculate the amount of excess reserves held by a bank? What is the significance of excess reserves?

Reserve requirements effectively impose a tax on bank deposits that reduce profits. Why does this tax...

Reserve requirements effectively impose a tax on bank deposits that reduce profits. Why does this tax increase as interest rates rise? A. States tend to increase franchise fees on banks as interest rates rise B. As interest rates rise, banks could earn more money by lending reserves to borrowers. These profits are limited by the reserve requirement, and the foregone profits increase as the interest rate rises. C. The Fed always increases the reserve requirement as interest rates rise D....

1. Suppose commercial banks borrow from Federal Reserve Banks at the discount rate. What is the...

1. Suppose commercial banks borrow from Federal Reserve Banks at the discount rate. What is the impact of this transaction on commercial bank reserves? a. Commercial bank reserves will increase. b. Commercial bank reserves will decrease. c. Commercial banks reserves will be unchanged. 2. Suppose the Fed reduces the reserve ratio. What impact will this transaction have on commercial bank reserves? a. Commercial bank reserves will increase. b. Commercial bank reserves will decrease. c. Commercial bank reserves will be unchanged....

a) Show the changes to the balance sheets for commercial banks when the Federal Reserve buys...

a) Show the changes to the balance sheets for commercial banks when the Federal Reserve buys $50 million in US Treasury Bills. If the public holds a fixed amount of currency ( so that all loans create an equal amount of deposits in the banking system), the minimum reserve requirement is 5%, by how much will checkable bank deposits in commercial banks change? b) Now suppose that the Fed raises the discount rate significantly. How would you expect this to...

The Federal Reserve sells Treasury bills to: A. the FOMC B. Commercial Banks C. The New...

The Federal Reserve sells Treasury bills to: A. the FOMC B. Commercial Banks C. The New York Stock Exchange

Show the changes to the balance sheets for commercial banks when the Federal Reserve buys $50...

Show the changes to the balance sheets for commercial banks when the Federal Reserve buys $50 million in US Treasury Bills. If the public holds a fixed amount of currency ( so that all loans create an equal amount of deposits in the banking system), the minimum reserve requirement is 5%, by how much will checkable bank deposits in commercial banks change? b) Now suppose that the Fed raises the discount rate significantly.How would you expect this to affect the...

Describe the functions performed by Federal Reserve Banks?

The Federal Reserve System consists of 12 regional Federal Reserve Banks. Each bank is sponsored and...

The Federal Reserve System consists of 12 regional Federal Reserve Banks. Each bank is sponsored and wholly owned by private commercial banks, who own all of the Bank's stock and receive stock dividends. Nonetheless, Mishkin describes the Federal Reserve Banks as "quasi-public" institutions. (a) Explain what aspects of the Federal Reserve System allow Mishkin to consider the Federal Reserve Banks semi-public entities.

Does the Federal Reserve operate like an ordinary commercial bank? What is the Fed's job?

Subjects