As we discovered in this chapter, monetary policy operates through the banking
system by altering the volume of bank reserves and, thereby, influencing the total
quantity of money and credit in the economy and affecting short-term interest
rates. However, the banking industry is highly concentrated, with the majority
of bank assets held by a relatively small number of the largest banking firms.
The purpose of this exercise is to gain insight as to how important the largest
banks are in terms of transmitting monetary policy changes to the economy. We
will focus here on one measure of the U.S. money supply-M1 (which includes mainly
currency in the hands of the public, transaction deposits at depository institutions,
and traveler's checks).
a. Visit the Federal Reserve's Web site at www.federalreserve.gov/releases
and look up the following information for December of last year from the Fed's
H.6 release-M1 (from Table 1) and "Demand Deposits and Other Checkable
Deposits: Total" (from Table 2).
b. Using the data from part (a) compute the fraction of M1 that is represented
by "Transaction Deposits," which are themselves made up of demand
deposits and other checkable deposits.
d. For each of the 10 banks you listed in part (c), go to the S&P's Market
Insight database at mhhe.com/edumarketinsight
and find the annual balance sheets for these banking companies. Look under
"Excel Analytics."
e. For the latest year for which you have information, add up the total "Transaction
Deposits" for all of the 10 top banks you have listed.
f. Construct the ratio of transaction deposits for the top 10 banks (from
part [e]) to transaction deposits for all depositories (from part [b]). This
number indicates how dominant these top 10 banks are within an industry of
close to 8,000 banking firms.
g. Construct the ratio of transaction deposits for the top 10 banks (from
part [e]) to M1 (from part [a]). This number indicates how important these
top 10 banks are in determining the U.S. economy's money supply.
