When a check is drawn against bank A and deposited in another bank, the first bank loses reserves as the check is cleared. Yet the check collection involves no loss of reserves by the banking system. Explain what significance this has for the lending ability of the system as a whole.

What will be an ideal response?


The system does not lose reserves as long as checks are being redeposit in other banks.  The reserves simply move from one bank to another within the system.  This means that the reserves are still available within the system to support loans and since reserves must be only a fraction of checkable deposits, they can support a multiple of the reserve amount in terms of loan and deposit values.  Reserves are sometimes called high-powered for that reason.