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Help with financial markets question?
Most non-financial firms would never hold as much of their assets in safe liquid securities as banks do. Why do banks maintain such a high percentage of investment in securities? Have banks gotten into trouble by improperly investing these liquid assets? Why? Cite specific recent examples. What are the new regulations on bank reserve requirements? Why were they enacted?
1 Answer
- MohammadLv 78 years agoFavorite Answer
1. Banks are a backbone of financial system of a country.
2. The main source of the banks' funds is deposits of people.
3. In view of this, to protect the interests of depositors, special legislations have been enacted in different countries.
4. Among other things, these legislations prescribe two types of reserve requirements:
-Cash Reserve Ratio(kept with central bank)
-Liquidity Ratio
5. Liquidity Ration portion of reserves is required to be invested in Government and other approved securities, as these are considered to be the safest.
6. There may be situations of 'run on banks' (abnormally high withdrawals of deposits).
7. Cash Reserve serves as the First Line of defence in such situations, while the Liquidity Ratio investments the Second Line of Defence.
8. Government securities are supposed to be the safest investment. But, recently, in certain European countries there were problems even with Government securities.
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Source(s): General Knowledge .....
