Final answer:
Banks acquire money through customer deposits and borrowing from other institutions or the Federal Reserve. They are expected to use this money to make loans, but in the late 2000s, they often used it to recover from the financial crisis. Banks create money through the lending process, which is regulated by the reserve requirement, while the FDIC insures consumer deposits.
Step-by-step explanation:
How Banks Acquire and Utilize Money
Banks get money primarily by accepting deposits from customers, which they then use to make loans to individuals and businesses. They also borrow from other financial institutions and, in some cases, from a central bank like the Federal Reserve in the United States. When banks get cash from the Federal Reserve, it is expected that they will use this to extend credit to spur economic activity. However, during the late 2000s, the newly generated money was often used by banks to strengthen their balance sheets and recover from the financial crisis, rather than flowing into the broader economy as loans.
Reserve Requirement and Money Creation
Banks are required to keep a certain percentage of their deposits as reserves (reserve requirement). This is a regulation intended to ensure that banks have enough funds available to meet the withdrawal demands of their customers. The amount banks can lend out is determined after accounting for this reserve requirement. Through the process of making loans over and above the reserves, banks effectively create money.
For example, if the reserve requirement is 10% and a bank receives a $1,000 deposit, it would need to hold $100 in reserve but could lend out $900. That $900 can become a deposit in another bank, which can then lend out a portion of it as well, thereby expanding the money supply further.
Insurance of Consumer Deposits
In the United States, consumer deposits in banks are insured up to a certain limit by the Federal Deposit Insurance Corporation (FDIC), providing a safety net for depositors and stability to the financial system.