Our bank has $135,000 in cash, and its liabilities that are subject to payment amount to only $64,900. It can safely invest $100,000, for the remaining $35, 000 is an ample reserve to carry against its deposit lia bilities. Suppose it buys bonds to that amount, and that its condition is therefore this: If the bank needs more cash at any time it can sell some of its bonds. Great care must be taken to make sure that only salable securities are bought. How ever good securities may be, they cannot take the place of a cash reserve, for they cannot be paid out over the counter to meet the demands of creditors for cash.
The question of accrued earnings comes up with investments, just as it does with loans and discounts.
11. Issuing bank notes.—A depositor may come in at any time to cash a check for, say, $1,000. Bank notes do as well as gold for him unless he has some special need, such as the necessity of sending money abroad. Suppose he takes notes. Deposits de crease, and a new liability appears in the form of notes, thus: The bank has merely changed one kind of liability for another. Since the notes may be presented for redemption at any time, a cash reserve must be carried against them, just as against deposits. Ordinarily it is not necessary to carry as large a ratio of reserves against notes as against deposits, for the reason that their redemption is not demanded as rapidly as is that of deposits.
The issue of notes is usually hedged about by legal restrictions. This question does not concern us here, and we have assumed that the bank has no restriction but its own judgment to act as a brake upon its action. Note-issue will be discussed in detail in a later chapter.
12. Other transactions.—We have traced the most common and fundamental transactions thru the bal ance sheet of the bank. Others might be explained, but the reader can easily think them out for himself. The working out of this kind of problem is one of the best exercises that can be devised for one who is beginning the study of banking.
13. Bank statement.—No attention has been given to the proper arrangement of the items on either side of the statement. In fact, statements of differ ent banks vary widely, not only as to the order in which the various items appear, but also as to what items shall be included in the general balance sheet.
The statement is worked out for the purpose of showing the condition of the bank at a given time. The law usually requires that certain items be given, but the requirements vary with different communities and with different kinds of banks in the same com munity. Many banks go beyond the legal require ments and give out statements in detail; others con dense as much as possible.
So far as mere arrangement of items is concerned, the best practice for a bank to adopt is to follow the custom prevalent among other banks of the same kind in the community. The ideal plan would be to ar range the items on both sides of the statement in the order of currency, and to place cash, easily liquidated assets, etc., at the head of the resources column, and deposits, notes, current obligations, etc., at the head of the liabilities column. All down the statement it would be well to place opposite each other those items which are ordinarily compared. Capital, surplus and undivided profits would then come at the foot of the liabilities column; and they should, for they merely show the difference between the total actual liabilities of the going concern and the total of the resources. Quick assets and current liabilities, the items of great est interest, would appear at the head of the state ment, where they would catch the eye immediately, and where they could be easily compared.
In the next chapter, a statement of one of the largest national banks in the United States will be given. The arrangement is that followed ordinarily by the national banks. Each item will be explained, except where explanation, for the time being, seems unnecessary or undesirable.