In any definition of these concepts, I miss the first step: how exactly does expansionary or contractionary (rate changes, req. reserve changes, ... ) monetary policy affect bank deposits and bank capital?


deposits: Suppose... central bank lowers interest rates on their deposit accounts... deposits decline because people move to equity rather? Suppose ... by increasing reserve requirements: bank needs more deposits? By

bank capital: ??? Suppose required reserved are increased... so a commercial bank's assets should increase, so it's capital goes up if asset's indeed increase ... or because it must increase it's capital, it can lend out less money? Something like that? Ok, now what if required reserves stay the same, but the deposit interest rate are increased by the central bank on required reserves? How does this channel work then?

What Is Bank Capital? Bank capital is the difference between a bank's assets and its liabilities, and it represents the net worth of the bank or its equity value to investors. The asset portion of a bank's capital includes cash, government securities, and interest-earning loans (e.g., mortgages, letters of credit, and inter-bank loans). The liabilities section of a bank's capital includes loan-loss reserves and any debt it owes. A bank's capital can be thought of as the margin to which creditors are covered if the bank would liquidate its assets.


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