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Information > Financial Terms > This page Earning Assets 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. |