Bond Investments

Investments in bonds are not generally used as a means of employing temporary balances. Rather it is permanent funds that are put into them. It may be part of the rest or reserve fund, or a certain proportion of the "notice" deposits. The general manager selects bonds that he regards as safe, liable to appreciate in value, and which give a suitable return on the money invested; and they are held till changes in the circumstances of the bank make it advisable to convert them into loans and discounts, or until appreciation in the prices of the securities tempts the bank to sell.

A general manager might think it good policy in a time of very severe competition, when the banks were outdoing each other in offering loans and discounts to borrowers, to hold a rather stiff course-keeping up his rates of discount and insisting on getting sound security for every advance. Such a policy followed at such a time would probably result in the loss of a number of large discount accounts to other banks. The money so repaid to the bank would be put into good bonds. Then, when the cycle of extra severe competition had passed, and money became scarcer and dearer, so that the bank was able to put its funds out in commercial discounts at more satisfactory rates and on satisfactory security, funds would be turned from bonds into discounts again.

The Cash Reserve

In his disposition of the funds, one of the chief of the general manager's cares is to have a sufficiency of immediately available assets. The funds that are employed as current discounts are regarded as more or less fixed. It will quite probably be the case that the bank could force payment of a large part of these advances whenever it chose. But to do so at all generally would cause great inconvenience to the customers, loss of valuable accounts, and perhaps excite alarm among depositors. So, as a rule, these discounts have to be allowed more or less to run their natural course. The gross amount will rise and fall with the seasonable or periodical changes in the trades and industries of the country.

At certain periods of the year the general manager knows that he will have to largely increase the bank's discounts, because certain industrial or mercantile customers then will require in the ordinary course of their business very heavy advances. At other periods the discounts will fall through the same or other large customers paying up - also in the ordinary course. It is the part of the "quick assets" to provide the funds needed for the expansion of loans, and to receive them again at the ensuing contraction.

How The Quick Assets Are Composed

The items of the quick assets are specie, legals, notes of and cheques on other banks, balances in other banks (home and foreign), securities, call loans (home and foreign). There must be enough of them, really available, to enable the bank to go its way, meeting the daily differences at the clearing houses, the seasonable expansion in its loans, the withdrawal of special deposits, without any effort whatever. Over and above this, there must be enough for all possible emergencies, the worst of which is "a run of depositors." Every prudent banker sees to it that he has a goodly fund ready at hand for these purposes.

Ordinarily, the more readily available a fund is the less is the income derived from it. For example, cash yields no direct income; balances in the strongest international banks, little or nothing. But experience shows that a bank that habitually runs very strong in quick assets indirectly derives a good deal of profit therefrom.

Its strength attracts depositors and a good class of customers; and it is able, especially in stringent times, to take up very valuable and profitable accounts which its heavily burdened competitors are forced to let go or for which they cannot compete.