Frederique, your lecturer, pays EUR330 every quarter to an insurance company DKV based in the Euro monetary zone for an international health insurance protection. She pays the insurance premium by using AUD564 from her transactional account at the CBA. CBA processes the payment using its own Euro-denominated transactional account it holds in its correspondent bank Societe Generale, based in Paris, in the Euro Zone.Describe the location of the CBA EUROS deposits in the balance sheet of CBA and in the balance sheet of Societe Generale. Explain your answer
Question
Frederique, your lecturer, pays EUR330 every quarter to an insurance company DKV based in the Euro monetary zone for an international health insurance protection. She pays the insurance premium by using AUD564 from her transactional account at the CBA. CBA processes the payment using its own Euro-denominated transactional account it holds in its correspondent bank Societe Generale, based in Paris, in the Euro Zone.Describe the location of the CBA EUROS deposits in the balance sheet of CBA and in the balance sheet of Societe Generale. Explain your answer
Solution
The Commonwealth Bank of Australia (CBA) and Societe Generale are both banks, but they operate in different monetary zones. CBA operates in the Australian Dollar (AUD) zone, while Societe Generale operates in the Euro (EUR) zone.
When Frederique pays her insurance premium, she uses AUD from her account at CBA. CBA then uses its Euro-denominated account at Societe Generale to process the payment.
In the balance sheet of CBA, the Euro deposits would be listed under "Assets". This is because from CBA's perspective, these deposits represent a claim or a resource owned by them. Specifically, it would be listed under "Cash and balances with banks" or "Due from banks" depending on the specific format of the balance sheet.
On the other hand, in the balance sheet of Societe Generale, the same Euro deposits would be listed under "Liabilities". This is because from Societe Generale's perspective, these deposits represent an obligation or an amount that they owe to CBA. Specifically, it would be listed under "Due to banks" or "Deposits from banks".
This is based on the fundamental accounting equation where Assets = Liabilities + Equity. From CBA's perspective, the Euro deposits are an asset, something they own. From Societe Generale's perspective, the Euro deposits are a liability, something they owe.
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your lecturer, pays EUR330 every quarter to an insurance company DKV based in the Euro monetary zone for an international health insurance protection. She pays the insurance premium by using AUD564 from her transactional account at the CBA. CBA processes the payment using its own Euro-denominated transactional account it holds in its correspondent bank Societe Generale, based in Paris, in the Euro Zone.Assume DKV has its transactional account in Credit agricole, another European bank. Draw the diagram of flow of funds including all parties involved (Frederique, DKV, CBA, Societe Generale and Credit Agricole) that captures Frederique's payment of her insurance premium. Explain your answer in depth.
Frederique, your lecturer, pays EUR330 every quarter to an insurance company DKV based in the Euro monetary zone for an international health insurance protection. She pays the insurance premium by using AUD564 from her transactional account at the CBA. CBA processes the payment using its own Euro-denominated transactional account it holds in its correspondent bank Societe Generale, based in Paris, in the Euro Zone.Assume that CBA has enough funds in its EURO deposit account to process the payment. Does the payment affect the stock of private money and central bank money in Australia? Explain your answers in depth.
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