modern fractional - reserve banking (3)

BUT what if the banker makes a mistake in his investment? Since nobody is Judgment is perfect and all investment involve some element of speculative risk , this is certainly a possibility . To lessen the chance of extreme losses , the banker can try to diversify his investment ,not putting all his eggs in one basket .Beside , a conservative bank will have a considerable amount of capital put up by the stockholders . for example , capital stock may have been issued equal to 10 per cent of demand deposits . Then , even if all the bank is asset are in earning investment rather than in non earning cash , depositors are protected against all capital losses that do not exceed 10 per cent of the bank is investment portfolio . Ordinarily , this will be sufficient ,as long as it keeps to high-grade bonds, mortgages , and conservative business loans. (in the 1970s,the fed has been worrying that large banks have been expanding activities beyond their prudent capital capacities.)
there is one last requirement the bank must meet if we are to give it an A+. The management must watch the general trend in the size of its deposits to make sure that its locality is not becoming a "ghost town " and that it is not losing deposits steadily over time . Were that the case , the bank is investment portfolio would have to be arranged to hold securities and loans that could be gradually liquidated and converted into cash to meet depositors withdrawals.