Central bank liquidating assests
For the most part, however, the public is prepared to leave its surplus funds on deposit with banks, confident that money will be available when needed.
But there may be times when unexpected demands for cash exceed what might reasonably have been anticipated; therefore, a bank must not only hold part of its assets in cash but also must keep a proportion of the remainder in assets that can be quickly converted into cash without significant loss. It may demand repayment of loans, immediately or at short notice; it may sell securities; or it may borrow from the central bank, using paper representing investments or loans as at a certain level or have access to a “lender of last resort,” such as a central bank.
Unless a bank held cash equivalent to 100 percent of its demand deposits, it could not meet the claims of depositors were they all to exercise in full and at the same time their right to demand cash.
If that were a common phenomenon, deposit banking could not survive.
Banks also hold cash reserves for interbank settlements as well as to provide depositors with cash on demand, thereby maintaining a “safe” ratio of cash to deposits.
The safe cash-to-assets ratio may be established by convention or by statute.
Only in this way can confidence in the banking system be maintained.
It must also keep a proportion of its assets in forms that can readily be converted into cash.
According to the real bills doctrine, if such rates are set low enough, the volume of loans and discounts will increase while the outstanding quantity of bank money will expand; in turn, this level to rise.
As prices rise, the nominal stock of “real bills” will tend to grow as well.
Bankers must also set aside cash reserves sufficient to meet routine demands (including the demand for reserves to meet minimum statutory requirements) while devoting remaining funds mainly to short-term commercial loans.
The presence of many short-term loans among a bank’s assets means that some bank loans are always coming due, making it possible for a bank to meet exceptional cash withdrawals or settlement dues by refraining from renewing or replacing some maturing loans.