As of this writing (November 2010), many U.S. banks still struggle to stay afloat in the post-mortage-meltdown economy. If a bank needs more cash to stay alive, you might naturally think, why doesn’t it just liquidate some of its assets? To partially answer this questions, let’s take a moment to exam what assets a bank typically has.
An asset, defined in simple terms, is “ownership of value that can be converted into cash (although cash itself is also considered an asset).” [Source: Asset – Wikipedia. Downloaded October 20, 2010 from http://en.wikipedia.org/wiki/Asset]
A bank’s assets typically include: (1) Reserves (i.e., the funds that the Federal Reserve requires banks to hold, as a percentage of checkable deposits), (2) Cash items in process of collection (e.g., checks from other banks that have not yet cleared), (3) Deposits at other banks, (4) Securities, (5) Loans, and (6) Miscellaneous assets (e.g., buildings, equipment, and other physical assets). [Source: Mishkin, Frederic S. Economics of Money Banking & Financial Markets. Boston: Addison-Wesley, 2004. Pages 222-223.]
Obviously, some of these assets simply cannot be liquidated. A bank absolutely has to meet its Federal Reserve requirements, for example. Miscellaneous assets like bank buildings can’t realistically be liquidated. And most loans cannot be efficiently liquidated; although they might be sellable to other banks, those other banks will typically expect a discount from the total amount of the loan.
The bottom line is that bankers are generally pretty efficient when it comes to maximizing the value of their assets. If they could readily raise funds to improve their position, they would likely do so. Most of their assets, however, simply cannot be reduced to liquid money in a way that makes sense.
Asset – Wikipedia. Downloaded October 20, 2010 from http://en.wikipedia.org/wiki/Asset Mishkin,
Frederic S. Economics of Money Banking & Financial Markets. Boston: Addison-Wesley, 2004. Pages 222-223.