REASON FOR MOVE

Press, Volume C, Issue 29608, 2 September 1961, Page 13

REASON FOR MOVE

Banks’ Stock Pledged

The trading banks which have borrowed from the Reserve Bank have raised their borrowings almost to the full value of the stock held by the Reserve Bank as security. This, in brief, is the cause of the temporary suspension—believed to be unprecedented—of the prohibition on unsecured loans to trading banks by the Reserve Bank The trading banks are required to maintain deposits with the Reserve Bank. The amount of these deposits has been steadily increased in recent months by increases in the reserve ratios. The most recent increase in these ratios became effectice on August 21. From that date, each trading bank has been required to maintain with the Reserve Bank deposits equal to 28 per cent. • previously 26 per cent.) of their demand liabilities and 10 per cent, of their time liabilities Credit Squeeze The effect of an increase in the reserve ratios is to discourage the trading banks from lending. If they have lent so much of their funds to their customers that they have not sufficient to maintain their statutory deposits with the Reserve Bank, they must borrow the balance from the Reserve Bank—at 7 per cent. This has been the situation since the credit squeeze started to “bite” some months ago. On August 30 trading bank borrowings from the Reserve Bank totalled £ 19.8 m, a rise of £4.9m in a week. The five trading banks held, on July 26 (the date of the latest available monthly return), securities totalling £23 3m. As not all of the trading banks have borrowed from the Reserve Bank, not all of this £ 23.3 m is available to the borrowing banks as security for their loans from the Reserve Bank. Any further increase in reserve ratios, or any increase in the trading banks' demand on time liabilities, without the waiver under section 14, would have produced an anomaly. The trading banks would have been forced to borrow more funds from the Reserve Bank to maintain their reserve ratios, but the Reserve Bank could not legally have advanced them any money above the value of their securities, now pledged almost to the hilt.