Question

During and after the global financial crisis, the Fed provided banks with large amounts of liquidity. Banks' excess reserves increased sharply, while credit extended to households and firms decreased sharply. Comment on the effectiveness of the bank lending channel during this period.

Short answer

It is extremely difficult to increase cash related to legal regulations, as the bank's reserves decline even as number of sales assets falls.

Step-by-step solution

Step 1; Concept Introduction.

The accessibility of borrowings and deposits by depository institutions is affected by changes in monetary policy, as shown by the financial intermediation channels.

Explanation of solution.

Certificates of deposit were required to be supported by bank reserves and liquidity ceilings under the restrictive banking rules. It is extremely hard to derive capital under these legal limits because the lender's reserves diminish as the number of customer deposits drops.

As a result among these prescribed limits, bank financial assets decreased from August 2014 to August 2017.