Managing Credit Risk and the Determinants of the Money Multiplier

Sentence count: 5
1. In my opinion, the biggest risk that banks face these days is the unusual large unanticipated
deposit outflows. It is because, due to inflation, people nowadays would withdraw their savings
in banks and use it in other necessities. Banks are not used to this situation so they have trouble
in maintaining a sound balance between cash on hand and the outflow demands. Banks should
be able to impose proper liquidity management measures which may include acquiring assets
that are easily convertible to cash. It should be done so that they'll be able to feed both deposit
withdrawals and demand payments.

Sentence count: 5
2. From the five guiding principles for managing credit risk, I choose having 'Collateral and
Compensating Balance Requirements' as one of the most important guide. It is because if the
borrower defaults or cannot pay his/her obligation anymore, then the collateral, or the property
that is promised to be given to the lender is a good compensation already for the losses suffered.
Another advantage is that with the compensating balance required, the lender or the bank can
still buffer their losses with the currently deposited amount of compensating balance. Of the
disadvantages I see is that, this kind of arrangement may not attract many borrowers due to the
strict and high-demanding collateral and compensating balance required. Nevertheless, this
guide gives both parties the protection they both need.

Sentence count: 7
3. First off, there are at least three factors that determine the money supply and they are the
following: reserve ratio, currency holdings and excess reserves. Reserve ratio can be defined as
a part of the reserve liabilities that the bank must hold and not lend out or invest. Meanwhile
currency holdings are currencies kept in large amounts as a part of a foreign exchange reserve.
Lastly, excess reserves are capital reserves kept in excess of what is required by law, creditors
and other internal controls.

The money multiplier formula shown on the left

shows the effect of currency holdings and excess
reserves. The first formula is the base sample,
meanwhile the formula on the lower left hand
corner shows the effect of increasing the currency
holdings while the right one shows the effect of
increasing the excess reserves. It can be seen that
currency holdings being on both the numerator
and denominator of the formula gives the biggest
effect on the multiplier while the excess reserves
just gives a minute change to the money multiplier since it only appears on the denominator side
of the formula.