Friday, May 1, 2009

losses and gains in Bank deposits

when bank loses deposits, the initial impact is ordinarily a reduction in the amount of its primary reserve-usually either vault cash or deposit in the Federal Reserve system. If the loss of reserves is such as to result in a deficiency in legal reserves,the bank will probably borrow from either the reserve bank or another commercial bank,perhaps a correspondent bank. if the decline in deposits proves to be more than temporary,the bank suffering the loss will have to reduce its secondary reserves and perhaps,ultimately,its loan portfolio.
The reserve process occurs when a bank gains deposits. When deposits rise,certain liquid assets,particularly excess reserves,will also increase. Therefore,in the short run at least,an increase in deposits may be associated with an increase in the liquidity ratio,just as a decline in deposits may be expected to be associated with a decline in the liquidity ratio. Subsequently,we would expect the bank with added excess reserves to employ these in acquiring such earning assets as loans or U.S.government securities,particularly in the intermediate maturity range so preferred by commercial banks.

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