It is hard to deny that we live in a money based society. Nothing is truly free and the prosperity of our lifestyles is closely related to our economic standing. From the wall street
"suits" to the farmer dressed in Carharts, we all share one common link- banks. I can't imagine
one adult person in America who does not patronize a bank in way or another. Most of us use
banks quite frequently, but they are often casually regarded until you really stop to look at the
way a bank operates. The bottom line is that a bank is a business. Their goal of operation is to
generate a profit, just like any other business. The interesting fact, though, is that they do it by
The bank monitors its financial operations the same as any other business, by analyzing
their assets and liabilities in a form of balance sheet. Items categorized on a bank's balance sheet
are a little more complicated that most others because a line item, such as a loan, can technically
be an asset or a liability depending on the specifics of that line item. Even something as
seemingly simple as an account in which a customer deposits money may be an asset or a
liability depending on the liquidity of the account.
The list of assets a bank has is one part of the liabilities/ assets calculation that determines
if a bank is generating a profit. One asset is reserves. Reserves is generally the amount of cash
held at the bank for day to day operations. An additional portion of reserves is usually held at the
Federal Reserve because a bank must have a set amount of liquid cash available in comparison to
the amount of instant liabilities the bank is responsible for. In other words, the federal guidelines
mandate that in a scenario where every account holder cashed out their accounts and withdrew all
their money, a bank must be able to have liquid funds available to honor those customer's
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