Bank multiplier is a mechanism for the growth of the total money supply, which is located on the deposit accounts of each commercial bank as a result of the movement of funds from one account to another.
The bank multiplier is triggered not only when a commercial bank provides a loan, but also when the Central Bank purchases currency, shares or other securities from commercial banks. As a result, there is a decrease in the resources of banks invested in active operations, and an increase in free reserves, which are then used for lending, that is, the bank multiplier begins to work. Consider this concept in more detail.
The essence and mechanism of the banking multiplier is most conveniently identified using a specific example. Suppose that a certain corporation served by Bank A sold export earnings through direct participation of the bank on the MICEX in the amount of 10,000 rubles, which was subsequently transferred to the correspondent account of the Central Bank of the Russian Federation. Bank A transferred funds to the bank account of the corporation (demand deposit). According to the norms established by the Central Bank, part of this money must be credited to a special account in the form of a mandatory minimum reserve. Suppose that the mandatory norm is 4%. Then the amount of the reserve will be 400 rubles.
Thus, a commercial bank receives at its disposal an amount of 9,600 rubles, which it can use to make a profit. These funds are also sometimes called excess reserves of a commercial bank. Nothing prevents the institution from directing them for a loan to another company that uses its services. So, our bank gives a loan to another company in the amount of 9,600 rubles. As a result of this operation, the excess reserve is reduced to zero along with the simultaneous crediting of the issued amount to a deposit at the same bank. Then, with a loan, the company paid for the raw materials and transferred the amount to the supplier’s account in Bank B. As a result, he receives at his disposal funds in the amount of 9,600 rubles, 4% of which (384 rubles) goes to the reserve, and the remaining 9,216 rubles. Bank B can also send a loan to any other company. Thus, there is an increase in money, and new amounts are added to existing loans and deposits.
Now consider how to calculate the bank multiplier. The formula is as follows:
Cbm = M2k.g. : (M2k.y. - M0n.y.), where
Cbm - coefficient of banking animation;
M2k.g. - the size of the money supply at the end of the accounting year;
M2n.y. - the size of the money supply at the beginning of the accounting year;
M0n.g. - the entire amount of cash at the beginning of the billing year.
The banking multiplier only works if the banking system has two levels. The first is the country's central bank, which controls this mechanism. And at the second level are the commercial banks themselves, which launch it regardless of their desire. Moreover, the effect of increasing money is achieved not by one single organization, but by the entire banking system. Obviously, bank animation directly depends on the amount of required reserves. The lower the norm, the greater the free reserves of commercial banks that they use and thereby increase the money supply.
Bank multiplier can work in the opposite direction. If customers begin to withdraw money from deposits in large quantities, the total amount of all loans will decrease and there will be a credit contraction of the money supply.
It is worth noting that among all active operations in the banking sector, only credit investments are able to create new deposits, thus fulfilling the emission function of the national banking system. The more loans issued, the greater the volume of issuing activity.