Question

In: Economics

1. Why do commercial banks hold investment securities? a. What type of transaction accounts do commercial...

1. Why do commercial banks hold investment securities? a. What type of transaction accounts do commercial banks issue? Which type of accounts have dominated the transaction accounts of banks? b. What has been the recent trend in the number of commercial banks in the United States? What factors account for this trend? c. Who are the major regulators of commercial banks? Which banks does each agency regulate? d. What are the advantages and disadvantages of international expansion?

Solutions

Expert Solution

1. Commercial banks earn a premium or income by lending the amounts deposited in the bank accounts. These deposits can be used to lend the money outright at an interest or can be used to make investment in securities or other instruments. All the Commercial banks are required to hold a certain quantum of their Deposits in the form of Reserves called the CRR. Other quantum is stored in the form of Bonds and Securities under SLR. Remaining amount is available for lending where commercial banks are required to give a mandatory proportion as loans. remaining amount can be used by management to invest in securities and bonds to increase the earnings of the bank as the Reserve securities are generally Govt bonds which dont have high yeild. similarly loaned amount can have defaults. So, this kind of security investment can also help in hedging the risk.

2.Commercial banks have Checking accounts, Savings/Deposit accounts or specialized accounts like Pension or EMI accounts.

3. Checking accounts which are also called Transaction account, Demand Deposit account, clearing account etc. is the most dominant form of account used in commercial banks.

4. Recently There had been a surge in no of Savings account due to expansion of Online banking and utility of banking on the go like Debit cards and ATM PoS etc.

5. Commercial Banks are regulated by Federal Reserve which acts as the Central Bank of the USA.Other Regulatory frameworks are FDIC and Office of the Comptroller of the currency.


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