The most important variations that occur in a bank’s balance sheet are those concerning cash in hand and with the Bank of England , investments , bills discounted and loans. When trade is good and industrial loans are in demand and command a good rate of interest , banks may reduce their investment in order to earn the higher rate of interest that can be obtained by lending to their customers and by discounting bills which will be offered for discount in increased volume. The amount shown as loans may , however be high even when trade is bad; this is largely because the loans made by the banks cannot be called in as borrowers have not the requisite funds to repay them; loans are sometimes frozen for years. The essence of banking is to reconcile the conflicting aims of maximizing earning power , preserving liquidity and avoiding undue risk. As a general rule assets that afford a high degree of liquidity do not command a high rate of interest. Equally the less the risk , the less the return. Cash in hand and with the bank of England is an extremely liquid asset but its earning power is virtually nil. Money at call and short Notice is , these terms are explained in the topic of the joint stock banking, and that they are fairly liquid and relatively safe but it ‘s earning power is not great. The rate of interest earned by the type of investment in which banks place their money depends very largely upon whether they are short term such as war bonds or irredeemable. These assets are safe and they are liquid in so far as they can be sold at any time. This is not true liquidity , however as the price obtainable varies and a forced sale may cause the price to fall considerably . The banks guard against this by valuing all investment at or under market value. When prices fall considerably as they did in 1953/4, the banks find that they have to write off a considerable proportion of the value of their investments. Any such loss is normally made good by drawing on unpublished hidden reserves. As investments are subject to this drawback the banks expect an normally obtain a higher yield Notice. The difference is not very great, however in the case of relatively short term items. In August , 1953, the rate for day to day and short period money was 2-21/2 %.The rate for 2-month treasury bills was 21/31/2% and for 3-month treasury bills 23/8%. The gross yield on 13/4% serial funding , 1955 was 277/240% while that on 21/2% war bonds 1955-57 was 261/120% and 4% Consols (Redeemable after February, 1957 was 49/40%. Acceptances and bills discounted involve an element of risk but the money is invested for relatively short periods. In fact with no acceptances it may well be argued that there is no investment at all. In August, 1954 the discount rate for 3-month Bank bills was 3% and for 3-month fine trade Bills 4-5%. The most lucrative of any bank’s assets are the advances to customers . Here there is a fair measure of risk although the minimum and money may be engaged for long or short periods . Rates of interest as has already been mentioned vary considerably but 4-6% is not unusual. In their endeavours to combine liquidity and security with earning power , the joint stock banks have arrived at a conventional pattern for development of their assets from which none of them vary very substantially. By way of example the assets of the London clearing banks were distributed as follows
£Million
|
% of Total Deposits
| |
Coin, Notes and Balances with bank of England
Balances with other banks and cheques in course of collection e.t.c
Money at call and short Notice
Treasury Deposit Receipts
Investment
Advances to customers and other Accounts
Other bills
Treasury bills
|
498
226
500
-
2,142
1,747
61
1,061
6,235
|
8.0
3.6
8.0
-
34.4
28.0
1.0
17.0
100.0
|
So there fore the total deposit of £6,235 million almost £4,000 million were in current accounts and the balance in deposit accounts.
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