Therefore such loans to the Stock Exchange (excepting, perhaps, amounts secured on Consols or such like) cannot fairly be entered under the heading of “call and short” money in a balance sheet. It is desirable, for these reasons, that balance sheets should give more explicit information than is usually the case; and more particularly they should specify separately the amounts lent to the bill-brokers at “call” and “notice,” and the amount lent to the Stock Exchange from account to account.
Turning to the question of “investments,” it may be noted in our table that those banks which show only a small proportion of “call” money, in most cases show a large proportion of “investments”; while, on the other hand, those which show a large amount at “call” hold only a small amount in “investments.”
The table exhibits a wide divergence in the proportions of “investments” held. These proportions vary from 11 per cent, to 31·5 per cent. The actual proportion of investments held, however, is not of so much concern as the nature of the securities which compose the investments; that is, whether or not they are readily realisable in case of need. The classes of investments are fairly shown in most bank balance sheets, and from a study of these some useful information can be gained. As an illustration of this, bank E in the table on page 94 shows in its balance sheet approximately the same holding in Consols as bank I, but the latter bank has deposits from its customers of twice the amount shown by the former. Now if bank E were to reduce its Consols by one-half (giving the same proportion as I), and put the proceeds in “cash” and “call money,” its position would appear thus (using the actual figures of Consols shown by the balance sheets of the two banks)—
| Cash and call money | 23 per cent. | |
| Investments | 24 per cent. | |
| while bank I (as shown by the table) stands— | ||
| Cash and call money | 32 per cent. | |
| Investments | 11 per cent. | |
This somewhat reduces the wide disparity at present shown in the respective figures, and it is quite possible that this difference could be still further reduced if we knew the actual amount held by each of these banks in securities, other than Consols, guaranteed by the British Government, and made the same assumptions with regard to these as in the case of Consols. As a matter of fact, considerably more than half of the 26·6 per cent. of investments held by bank E appears in the balance sheet of the bank as being composed of such securities, and these might prove a more valuable asset in time of trouble than so much money nominally at “call” or “short notice.”
From this example we can see that in examining the balance sheet of any bank, particular attention must be paid to the composition of the investments, whether they are of such a character that one may fairly rely on being able in time of stress to realise them immediately, or, in the alternative, borrow from the Bank of England on their security. We may repeat, as the matter is of importance, that the actual amount of securities held, or the proportion which they bear to the total balances, is not of such importance in the case of a bank, as the nature of the securities which form the investments. One London bank’s investments simply consist of a large holding of Consols; and though times might conceivably come when it would be impossible to realise even such a holding at short notice, yet such an investment forms a backbone and reserve which cannot be overestimated.
Having considered the securities which constitute the “liquid assets ” of bankers, we will now briefly turn our attention to the manner in which the remainder of bankers’ funds are usually utilised. As we have already seen, this remainder is used mainly in discount operations and advances to customers, while a certain amount is generally sunk in premises, etc. These three items have been classified together in our table, as the necessary information is not given in some of the published balance sheets to enable us to specify them separately. As regards “premises,” it may be repeated that though they form a valuable asset, yet they are not an available one, and would, generally speaking, only be realised in the event of a winding-up.
The bills held under discount comprise bills which are discounted for the customers in the ordinary course of business, and also bills bought from bill-brokers; and they constitute a fairly available asset.
The “Advances” to customers is a security of a very fixed nature. In times of trouble it is the asset most difficult of realisation, and it is the rock on which the majority of banks which have come to grief have struck.
No information respecting this asset is vouchsafed in any balance sheet beyond the bare total. It is a known fact that banks are lenders on practically any kind of security which has a fairly steady value, and in which there is a “market”; stocks, shares, produce, houses, lands—all are offered as security, and all are accepted under various conditions. But it is of the utmost importance that bankers should closely watch and scrutinise the aggregate of advances which they may make upon any one kind of security, so as to keep the amount within due limits. If too large a sum is advanced on one kind of security, and that security should become much depressed in value, the banker may be caught between two fires: on the one hand, the customers who have deposited this security will, from its fall in value, have become financially weakened, and perhaps not be in a position to repay the advances; and on the other hand, if the banker wish to repay himself by realising the securities, he may find that the margin of value has run off, and what can be obtained by selling the securities in the market will not cover the advances, or possibly, for the time being, they will prove to be unsaleable. Thus he will be left in the dangerous position of having a considerable proportion of his assets indefinitely locked up, and a certain number of his customers in a weak and reduced condition financially.