bank lending and liquidity

the pattern of bank is lending business, as well as the character of its deposits, also helps determine its needed liquidity ratio. the economic structure of the community in which the bank is located will affect both the seasonal and the cyclical nature of loan demands that converge on the bank in question. the composition and maturity pattern of a banks loan portfolio, as well as the character of its investment portfolio, greatly influence the liquidity needs of a particular bank. a bank that has a loan portfolio with well-spaced maturities of loans, or a bank that has a high proportion of government notes or bonds falling due within a year or two, may feel less need for a high ratio of liquid assets to deposit than another bank that is not so fortunately situated.
Management Attitudes,Certain management attitudes or predilections may also determine the felt liquidity needs of a particular bank. Some bank managements simply have more risk aversion or are more conservative in their attitudes than others. we would expected a more conservative bank management to wish to hold a higher proportion of liquid assets than another bank with a somewhat less conservative management. Also, the attitude of given bank 's management toward borrowing from the regional reserve bank is important. those member banks that are willing to borrow whenever necessary and possible would presumably need a somewhat lower liquidity ratio than banks that borrow seldom, if at all, from the federal reserve.
LARGER AND SMALLER BANKS, The level of primary reserve that is legally required may also help explain certain of the differences between, say, larger and smaller banks. Those larger member banks of the federal reserve System that are city banks have always had higher legal reserve ratios imposed upon them than on those smaller member banks classified as "all other member banks" which were formerly called country banks. Any member bank that has over $400 million in net demand deposits had a legal reserve ratio of 16.25 per cent applied to all of its demand deposits over $400 million in 1977. the downward pressures on bank profits, which these higher reserve requirements imply, may help explain a seemingly greater interest on the part of city banks in investing a higher proportion of the available resources in higher-yielding assets in the maturity and risk area beyond those of the most highly liquid assets. furthermore, such city banks, as we have already indicated, tend to have a low level of excess primary reserves.