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Earning Assets
Source: Encyclopedia of Banking & Finance (9h Edition) by Charles
J Woelfel
(We recommend this as work of authority and you can order
it here)
Loans, discounts,
and investments of a bank, constituting the major source of earning power
for a commercial bank. Expansion
in earning assets depends upon the availability of EXCESS RESERVES, and
results in expansion in deposits of the banking system. Conversely, credit deflation (contraction in earning assets)
reduces deposits and adds to excess reserves of the banking system.
Despite quantitative and qualitative controls over credit expansion
and contraction, such as reserve requirements, open market operations
on loans and investments, and examination standards, expansion and contraction
in earning assets are largely a matter of individual bank credit policy.
As a practical matter, however, individual banks tend to follow
the group trend voluntarily, to keep up with competitors during expansion
and to protect themselves from being last in liquidation of loans and
investments whenever the spiral of deflation is started.
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