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
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 is in Australia, which uses the Australian Dollar (AUD), while Societe Generale is in the Euro Zone, which uses the Euro (EUR).
When your lecturer 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 these deposits represent a resource owned by the bank (CBA) that it can use to cover its liabilities or fund its operations. Specifically, it would be listed under "Cash and cash equivalents" or "Due from banks" depending on the specific accounting practices of CBA.
On the other hand, in the balance sheet of Societe Generale, the Euro deposits of CBA would be listed under "Liabilities". This is because these deposits represent an obligation of Societe Generale to CBA. Specifically, it would be listed under "Due to banks" or "Deposits from banks".
This is because when a bank holds deposits for another bank, it essentially owes that money back to the depositing bank. Therefore, from Societe Generale's perspective, the Euro deposits from CBA are a liability. Conversely, from CBA's perspective, these deposits are an asset because they represent a claim on Societe Generale.
In summary, the location of the Euro deposits in the balance sheets of CBA and Societe Generale would be under "Assets" and "Liabilities" respectively.
Similar Questions
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. Draw the changes in CBA's balance sheet when it processes Frederique' payment for her EURO330 (AUD564) insurance premium. Does the payment affect the stock of private money and central bank money in Australia? Explain your answers in depth.
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