/banking/Banks Joint Stock Contd

Banks Joint Stock Contd

/banking/Banks, Joint-stock (cont�d) The most liquid asset is cash, either in the form of notes or coin or balances with the Bank of England (shown as 'bankers' deposits' in the latter's balance sheet). The cash item is conventionally held at approximately 8 per cent of total deposits, but this figure is not always a reliable guide to the total liquidity position of the banks, for if reserves fall below it they can easily be restored by recalling short-term loans. Thus the total 'liquid assets' ratio (i.e. ratio of cash plus other liquid assets to total deposits) is considered the more important indicator. These remaining liquid assets, which are usually held at approximately 30 to 35 per cent of total deposits, are: (1) money at call and short notice, consisting mainly of day-to-day loans to the Discount Market which earn relatively low rates of interest; (2) bills discounted, including some commercial bills, but mainly comprising Treasury bills bought from the discount houses when partly matured.

Special deposits at the Bank of England, introduced in T960, are designed to reduce the liquidity of banks in order to reduce their lending.

The remaining 'earning assets' are: (1) Investments consist mainly of British Government securities. British banks concentrate largely on holding bonds with less than ten years to run to maturity. Investments are therefore relatively illiquid and, as theft prices may fluctuate sharply, they are also of uncertain value, although readily saleable. To minimize this possibility of capital Tosses through the enforced sale of longer-term bonds at times when their prices are falling, the banks aim to hold a proportion of bonds with early maturity dates. (2) Advances are the least liquid but most profitable of the assets. Bank advances (with some exceptions) are formally repayable on demand but in practice many are renewed repeatedly.

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