money, bankingExplain why bank’s holdings of cash have increased significantly as a portion of their balance sheets in recent times.

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belarafon's profile pic

belarafon | High School Teacher | (Level 2) Educator Emeritus

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Cash holding is also a hedge against "runs" on banks; when people lose faith in the system, they often try to take out as much money as possible before the bank collapses. By holding large amounts of cash, the bank is able to calm the public with the implicit knowledge that everyone will be able to get their money in case of emergencies or disasters.

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accessteacher | High School Teacher | (Level 3) Distinguished Educator

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This is a deliberate policy of banks in order to make sure that they manage risk effectively. If cash makes up more of their balance sheet it is because they are making less loans and holding more in reserve in case those who have taken loans from the bank default. It is a deliberate move towards a more cautious financial strategy.

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vangoghfan | College Teacher | (Level 2) Educator Emeritus

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As I understand it, the main reason is that they are worried about lending, having made so many bad lending decisions in the recent past. It is safer and easier to sit on cash than to loan it and run the risk of losing it. In "normal" economic times, it might be more profitable to loan cash than to sit on it, but these, unfortunately, are not "normal" economic times.

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Karen P.L. Hardison | College Teacher | eNotes Employee

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The Federal Reserve Bank of New York has argued that the reason for increased bank reserves of cash is directly related to the "size" of the Federal Reserves' lending initiatives. The Fed has a current policy encouraging lending and spending, witnessed by the dominance of lower interest rates. Some suggest the policy is ineffective in generating lending. The Federal Reserve Bank of New York contends the contrary suggesting that the Fed has imitated such a large stimulus that it has accumulated as banking institution cash reserves. This indicates consumers are not borrowing and that institutions will have ample supplies when the economy stabilizes and consumers (business and individuals) start borrowing again.

http://www.newyorkfed.org/research/staff_reports/sr380.pdf

rrteacher's profile pic

rrteacher | College Teacher | (Level 2) Educator Emeritus

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The above answers are all correct, and they all point to uncertainty or even pessimism about the economic future. This is one reason why credit remains fairly tight, even though interest rates from the Fed remain very low.

litteacher8's profile pic

litteacher8 | High School Teacher | (Level 3) Distinguished Educator

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The economy is in bad shape. The stock market downturn frankly scared a lot of people. Organizations react much as people do. They get nervous and start holding on to as much cash as possible. This is true of banks as well as corporations, and more so for banks because they might worry about a run on cash withdrawals.
readerofbooks's profile pic

readerofbooks | College Teacher | (Level 2) Educator Emeritus

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There are three reasons for this. First, banks made so many bad loans in the past that they need to keep money in reserve for defaults. We will still have home foreclosures and other hardships that will come up in the future. Second, there is a public outcry that banks have lent too much money in a predatory way. Hence, there is social pressure. Third, the government conducted "stress tests" on our banks and hence there is some political pressure for banks to hold some money in reserve.

pohnpei397's profile pic

pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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The most likely reason for this is that banks are worried about lending in poor economic times.  Banks may fear that loans they make will not be paid back and so they decide not to lend.  When this happens, cash makes up a bigger portion of their balance sheets.

ranger1980's profile pic

ranger1980 | Student, Undergraduate | (Level 1) Valedictorian

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There are three reasons for this. First, banks made so many bad loans in the past that they need to keep money in reserve for defaults. We will still have home foreclosures and other hardships that will come up in the future. Second, there is a public outcry that banks have lent too much money in a predatory way. Hence, there is social pressure. Third, the government conducted "stress tests" on our banks and hence there is some political pressure for banks to hold some money in reserve.

you really made a interest point. I look up at the book and that is the correct answer the only thing that I don't I inderstand is the second reason i thought it was "vault cash"  

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