Abstract
The fractional reserve theory of money creation only considers the reserve requirement but ignores prudential regulations. We study the impacts of four prudential regulations under the Basel III framework on the commercial bank’s ability to create money. Using a balance sheet approach, we formulate the corresponding maximum money multiplier under each regulation. We find that in addition to the concerned minimum required ratio, the banking system’s liquidity and default risk portfolios also play key roles in determining the maximum money supply.
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