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Difficulty: HardCommercial Banks: Functions, Services, and Credit Creation

Match each commercial banking regulatory instrument or credit creation concept with its corresponding operational mechanism.

  • Credit MultiplierReflects the reciprocal of statutory cash reserves (1CRR\frac{1}{\text{CRR}}), determining maximum bank deposit expansion potential.
  • Cash Reserve RatioMandates the minimum percentage of total customer deposits commercial banks must keep unlent as cash.
  • Liquidity RatioDictates the statutory proportion of total deposits commercial banks must maintain in near-money assets to guarantee solvency.
  • Special DepositServes as an compulsory reserve freeze impounded directly by the central bank to sterilize excess bank liquidity.

Answer

Credit Multiplier matches with the reciprocal of statutory cash reserves; Cash Reserve Ratio matches with the mandatory percentage of deposits kept unlent as cash; Liquidity Ratio matches with the statutory proportion of deposits held in near-money assets; Special Deposit matches with the compulsory reserve freeze impounded by the central bank.
The items accurately match their mechanisms: Credit Multiplier represents deposit expansion potential through the inverse reserve ratio; Cash Reserve Ratio mandates minimum idle cash holdings; Liquidity Ratio mandates short-term liquid asset reserves for operational solvency; Special Deposit functions as an emergency monetary policy tool to absorb excess bank liquidity.

Step-by-Step Solution

1
Analyze the deposit expansion multiplier definition
Credit Multiplier is the inverse of the Cash Reserve Ratio (K=1CRRK = \frac{1}{\text{CRR}}).
It measures systemic secondary credit expansion across the banking network based on cash reserve requirements.
2
Distinguish between reserve requirements and liquidity requirements
Cash Reserve Ratio targets unlent vault/central bank cash, while Liquidity Ratio covers liquid securities such as Treasury bills.
CRR restricts base lending reserves, whereas liquidity ratios preserve daily solvency.
3
Identify intervention mechanisms for credit control
Special Deposits directly isolate excess liquidity held by commercial banks.
The monetary authority impounds these funds when conventional reserve ratios fail to curb inflationary credit creation.

Key Concept

Commercial Bank Credit Creation and Regulatory Controls
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Topics

Commercial Banks: Functions, Services, and Credit Creation

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