To put some fraction of a bank's funds into permanent invest ments is altogether safe and fitting, for in emergency they can be readily converted into cash through the stock exchange. Ex tensive dependence of all the banks on the securities market for such conversion, however, becomes positively dangerous. In order to accomplish a sale in a tight money market, not only must securities be sacrificed at great losses but the buyers go to other banks to withdraw funds to do the buying, thus making the market still tighter and tending to precipitate a panic. Accord ingly the business world takes note of the ratios of loans and investments to total resources. The banking situation of the coun try becomes more critical as the proportion of loans to aggregate resources increases, because such a change means an absorption of the loan fund; and it becomes even more critical as the ratio of investments to aggregate resources increases, for the additional reason that a larger proportion of banking funds is being tied up in long-term securities which are difficult to liquefy. Babson summarizes the barometrics of these ratios as follows:' 1. During a period of business depression: (a) An increase in the ratio signifies renewed activity.
(b) A decrease signifies a further recession in business.
(c) No change signifies continued dullness.
2. During a period of improvement following a period of business depression: (a) An increase in the ratio signifies increased activity.
(b) A decrease signifies a temporary recession.
(c) No change calls for special watchfulness.
3. During a period of prosperity: (a) An increase in the ratio signifies that fundamental con ditions are becoming unsound.
(b) A decrease tends to prolong the period of prosperity.
(c) No change signifies nothing of importance.
4. During a period of decline following a period of prosperity: (a) An increase in the ratio signifies further trouble.
(b) A decrease is the natural movement.
(c) No change calls for special watchfulness.
Effect of Other Operations on the Bank Statement So far as developed in the preceding sections, the operations of White, the bank, might result in a capital statement such as the following: It is now proposed to explain certain other simple but typical operations, and indicate their effects upon the bank's statement.
The accounts entitled "Due from Banks" and "Due to Banks" arise because the bank finds it expedient to open accounts with other banks, and to deposit certain of its funds with them. These depository banks are called "correspondents." Such ac counts serve among others the following purposes: 1. They enable the bank to sell drafts against this distant metropolitan correspondent and charge exchange for the service.
2. The banks may arrange mutually to act as collecting agent one for the other, and possibly charge for the service.
3. In time of stress the local bank can count on accommoda tion from the metropolitan correspondent.
4. The correspondent may furnish special services for the local bank, such as credit advice, investment of funds, safe-keep ing of securities, and the like. The local bank may in turn carry accounts of banks for which it acts as correspondent.
Whenever a statement of the bank is made, therefore, among the assets will appear Due from Banks, and among the liabilities Due to Banks.
If a draft is sold by the local bank, the Due from Banks is reduced by the face amount of the draft. Undivided Profits is increased by the charge for exchange, and, if the face of the draft and the exchange charge are paid in cash, Cash will be increased by these amounts. If, however, the buyer of the draft pays by check on the selling bank, Deposits is reduced, and if by check on other banks, Due from Banks is increased.
When items are received for collection and credit, the local bank credits the remitter's (or depositor's) account with the face amount of the items—that is, credits Deposits and carries items among the assets as Collection Items in process of collection; when collected, either Cash or Due from Banks is increased. Checks on local clearing house banks are usually separated from checks on out-of-town banks and are reported as Clearing House Items.
The purchase of a site, a building, furniture, and fixtures, reduces the bank's Cash or its balances Due from Banks. Such payments by the bank are usually made by cashier's checks or drafts; while these checks are outstanding they appear among the liabilities, and when they are presented for payment, Cash will be reduced.
Stationery, wages, salaries, rent, taxes, and so forth are ex pense items that will likewise be paid by cashier's checks. Temporarily they will appear as Expense among the assets and Cashier's Checks among the liabilities; the ultimate disposition will be the reduction of Cash by payment of the checks and the reduction of the Undivided Profits.
Customers may deposit cash funds and take certificates of deposit, which will thereafter appear among the liabilities.
These certificates state that the customer deposited a certain amount on a given date, which will be repaid to him with inter est at a stated rate provided payment is not demanded within a stipulated time.