The text book says that:
1. If banks collectively choose to hold a lower liquidity ratio, they will have surplus liquidity.
As seen in the theory of credit creation, even if a single bank operates with a lower liquidity ratio it'll have surplus liquidity.
So what's special about banks holding a lower liquidity ratio collectively?
2. Although CDs are liquid to an individual bank, they do not add to the liquidity of the banking system as a whole. By using them for credit creation, the banking system is operating with a lower overall liquidity ratio.
Please Explain.
Thank You
Last edited by a moderator: Mar 26, 2014