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What Are The Determinants Of Deposit Creation By Banks?

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Sudipa Sarkar answered
Followings are the determinants deposit creation by banks –

(I) The amount of deposit created by the commercial banks will depend on the amount of excess reserves held by the commercial banks. The greater the amount of excess reserves the greater will also be the amount of deposits created.
(II) The amount of deposits created by the banking system as a whole also depends on the reserve ratio maintained by the banking system as a whole. The central bank of any country has the power to influence this minimum reserve ratio. If the central bank rises the minimum reserve ratio then amount of deposit created will be reduced and if the central bank lowers the minimum reserve ratio then the amount of deposit created will increase.
(III) The amount of deposit created by the commercial banks will also depend on the banking habits of the people. If the banking habits of the people are well developed and if most of the transactions are settled through cheques then the credit creating capacity of the commercial banks will be higher, and vice versa.
(IV) Banks always give loans by accepting securities. Hence, the total amount of deposits created by the banking sector depends on the amount of mortgage properties in the country.
(V) The amount of deposit created by the banking system also depends on the existing business conditions.
(VI) The banking system as a whole can create deposits up to an amount which is a multiple of the total excess reserves of the banking system. A single bank cannot create deposits exceeding its excess reserves. The total amount of deposit created by the banking system as a whole depends on the expansion of banking system in the country.

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