The banker likes to have all his assets earning profits. Loans and Discounts earn interest and discount; the Securities Owned yield interest or dividends and may increase in value with changes in the market or with the approach of their maturity dates; portions of the bank building may be leased to outsiders for good rentals; the Due from Banks may be earning 2 or more per cent on its average amount; Clearing House Items and Transits are not earning assets, and are therefore cleared or collected as fast as possible and the receipts put into earning forms; but the Cash on Hand appears to the banker an idle asset. Though the maintenance of such idle funds is a necessity for the bank's very existence, it is a necessary evil which he would minimize.
Since the liabilities of a commercial bank are characteristically demand liabilities, the immediate convertibility of the earning assets is their prime essential. The creditors demand cash and are not satisfied with the delivery of securities, however excellent. To offer anything but cash is a confession of failure. Therefore it is the practice, even in the final liquidation of an insolvent bank, to convert the securities at market prices and pay cash to claimants rather than to offer the securities direct. The same holds true of discount paper. Securities or purchased paper, however excellent, are no substitute for cash reserve, though the bank's reserve position may be greatly fortified by their judicious selection. Such readily convertible assets constitute the bank's secondary reserve.
Ready convertibility depends upon:
1. The Organization Of The Market For The Respective Assets.
2. Their Usance.
3. Their Self-Liquidating Quality.