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okay what we want to do today is pick up our discussion again of the sources and uses of bank funds you remember we've got this simple model of a bank really and it's showing where the funds are coming from the deposits borrowing and then capital now so the dollars come in from these various sources at that moment that a depositor makes a deposit or a lender loans money to the bank or an owner hands money over to the bank at that moment the bank's got cash right and so those are assets those dollars that cash is an asset and the bank could just sit there and hold on to that cash and that could be the end of the story the only thing is if a bank just holds on to cash and does nothing else with it then that Bank is not going to be able to pay interest to depositors interest to the lenders and is not going to be able to turn a profits back to the owners and so they excuse me they're not gonna just hold cash but at that moment they acquire assets and some of those dollars some of that cash they do continue holding on to and the reserve accounts for example if you go into a bank and they have dollars in the vault that's cash and so as we start working our way down we'll talk about four different categories of Bank assets and I'll talk about each one the first one we'll call primary reserves these primary reserves everything in this category constitutes liquid assets and they earn no interest and this one include just the dollars in the vault for example but it includes dollars deposit at the Federal Reserve and so let me put here is legal reserves by the way I use the term twice now so let me use quote marks here on this primary reserves these are unofficial terms I don't mean to say that the Federal Reserve or banks have to label them this way these are terms that money and banking professors use to basically break all these assets into categories into functional categories what do they mean what is their purpose for being held and so legal reserves is just a label that we are attaching legal reserves that I say legal twice primary reserves are liquid assets that are no interest and legal reserves are either at the Fed let's say in the vault or at the Fed and in the one case the the dollars end of all that is just cash that's $10 bills $20 bills and so forth okay and when I say in the bold I would also mean the cash drawers of the tellers and so forth but it's on the premises its cash and these funds that are at the Federal Reserve and there are legal accounts and they're legally maintained reserve accounts these are deposits that are there and then the Federal Reserve says okay we got it how we'll give you credit and the bank treats that as cash okay now I'll say a1 a2 a1 is required reserves okay and by required reserves I mean this it's a certain percent of checking account deposits and so to go back when people put money in the bank into a deposit if it's in a savings account or a time deposit there is no reserve the bank has to maintain but if you put money into a demand deposit or a now account the banker must maintain reserves against that and the reserves can be in the vault or they can be at the Fed but there has to be a reserve what percent and the answer is it depends on how big the bank is for the smallest banks this is a 3% reserve and for the medium-sized and large banks it's ten percent now most banks you know we've got what seven thousand banks most banks are small banks but most deposits like if we just went out and said hey how much are in checking two deposits and all the banks in the United States around seven hundred billion dollars most of that seven hundred billion dollars is a medium-sized banks and large banks the small banks collectively I think all the small banks probably if you looked at 6600 small banks in the United States the community banks all of them collectively maybe hold as much in checking deposits as one you know Bank of America and that's not for sure but something on that order and so what I'm saying to you is most checking accounts are held at medium-sized and large banks so most the dollar value of checking accounts so most deposits are subject to that ten percent reserve requirement okay but then the smaller banks are maintaining a smaller reserve requirement and to a great extent this is political the Federal Reserve the legislation that authorizes the Federal Reserve to require the reserves it is saying you know we can make a lot of banks happy thousands of thousands by having this lower required reserve requirement and so we'll just kind of do that and keep them you know feeling kind of good about the whole system it's not punitive this is the bankers thinking this whoever whichever size bank it is somebody makes a deposit I have to set some of this aside and not get interest gosh I don't like that and the higher this reserve ratio then the more we set aside the other 90% is going to be loaned out or invested in bonds for example and or an interest and so the higher this ratio if this were a 50% ratio we can only take 50% of it make loans and buy bonds investments and so the older this is the more brought a banks like it okay so anyway that's required reserves most of these reserves are not kept in the vault think about this over time what happens is our banking system grows not rapidly but over time the banking system grows over time there's more and more deposits at banks and the banks total assets are growing and if deposits are growing over time then what that means is each year there's more money put into deposits then it's withdrawn that's how the bank grows is more comes in then goes out and so over time since there's more deposits being made than withdrawals then that means on the average day not every day but on an average day more deposits coming in than are being withdrawn and that mean on the average day a banker could start up with almost nothing in the vault and yeah there's gonna be somebody come in and say I want to withdraw money from my account but on that average day there'd be more people coming in making deposits and so on the average day the bank doesn't need a lot in the vault this money sitting around the vault is just something you know that's got to be managed somebody's got to do something with it and if you kept all your reserves in the vault you need a bigger ball okay and so we don't need too much and it's also subject to bezel Montour theft or worms again I don't know what happens to it and so the bankers gonna keep a modest amount in the vault now by a modest amount I don't mean to say modesty or me you know for me fifty thousand bucks would be a whole lot of cash and for a banker not so much but what I'm saying to you is there could be a bank that's holding a hundred million dollars worth of deposits and they're not gonna keep like 1 million dollars just sitting around they just don't need it most of these reserves are going to the Federal Reserve now let me come back then let's say that a deposit is made we'll take a simple example let's say that a deposit is made of $100 and the banker in the first instance I mean boom right now they get that hundred dollars they say let's put this in the cash drawer let's put it in the vault at that moment that's $100 of cash that counts as reserves and at that moment before anything else can be done the banker says hey I only have to hold $10 on reserve I am holding a hundred I only have to hold ten and so the remainder would be an excess reserve and so these legal reserves you either have to hold them or you don't and since we're not getting interest and the Federal Reserve does sometimes pay interest on these reserves but it's a very low rate since we're getting little or no interest on these reserves what bankers are gonna say is I would rather not I would rather not have excess reserves but that I mean at the first instance you have no choice somebody comes in says here I wanted to posit a hundred dollars in the account you say okay at that moment you say okay you have got excess reserves but as quickly as possible banks will get rid of these excess reserves and use them to make a loan or do something else that we're going to talk about but excess reserves would be dollars in the vault or at the Fed that do not have to be held they are not required okay so anyway let's go on to a second category second component of these primary reserves to be a primary reserve it's got to be liquid assets either cash or near cash but earn no interest here's number two okay see I P C equals check items in the process of collection these are liquid because they don't exist for very long and it is just what it sounds like check items in the process of collection here's what happens here we've got a bank we're just sitting around taking it easy chatting at the water cooler somebody walks in says hey I've got a paycheck from work I want to put this in my account you say ok how much they say $1,000 and they give us a deposit here's $1,000 coming in we say ok thank you we give them a deposit slip you know they're gonna have to wait to actually get credit on this for a couple days but anyway we give them a deposit slip and they go away and they know they can get this money in a couple days what we do before the day is over we at our bank here as we say let's send this a way to be collected it's a cheque clearing process so we send that check away thousand bucks and maybe it's written on I don't know a construction company or a manufacturing company or a retail store wherever this depositor wherever they work their employer gave them a paycheck and so what we're basically going to do is send this check away back to the employers bank to collect on this now where's the employer the employer could be here in town or their bank could be here in town employer could be in another state could be on an opposite side of the United States so where are we send it depends on where we are if the employer let's say that this this depositor came in and gave us a check and they work for a local construction company in the local construction company has a bank here in town then what we would do is basically take this check at the end of the day and meet with the other banks in town and say hey we've got twenty three thousand four hundred dollars worth of checks written on you and they'd say well we have twenty three thousand dollars of checks written on you and then we would hand those over there's only one thousand four three hundred dollars that needs to be actually somebody pay somebody else and we're netting these out against each other and the banks are getting together with and a little community kind of a deal and then what they'll do at that point is settle up on reserves they will tell the Federal Reserve hey take one thousand three hundred dollars out of my reserve account that reserve account at the Fed and transfer it to that of the bank if yet this depositor comes in and gives us a paycheck and it doesn't have to be a paycheck just any kind of a check written on a bank far away more likely we're gonna send this cheque off to the Federal Reserve and say we want to collect on this and the Federal Reserve is say okay and send that check back to the other bank and give us credit for it and debit the other banks reserve account at the Fed so we're gonna see credit show up as our reserves at the Fed now I'm giving you a little bit of the mechanics of this here's the key though let's say it takes us we'll just say hypothetically two days to get credit for this check a depositor gave us a check we sent it away and there's two days that that check is gone it's out of our hands and we're waiting for the Federal Reserve to credit us so for those two days what we would do is we would enter $1,000 here we don't immediately say oh I've got $1,000 at the Fed a customer gave me a thousand bucks I handed that check over to the Fed I get a thousand bucks not yet there's two days in there and our little story here where we say I'm gonna get a thousand bucks two days from now and so for those two days we would say we've got to check in the process of collection and we'd enter it right here it's a liquid asset because the money will be here soon and it'll go into this legal reserves probably excess but anyway it will go in as our legal reserves at the Fed two days from now but for those two days we don't have it we just got and it's not called this but it's comparable to an account receivable huh two days are gonna receive some money but not yet and so then two days from now the Federal Reserve and say just hey we credited your reserve account and so now we have legal reserves at the Fed and then we would wipe this thousand dollars off that's no longer in the processor question it's been collected okay now the Fed the banks don't like this it's like hey at the wait to get my money and I'm not getting the interest on it it's very liquid I'm gonna get paid in two days I earn own interest I don't like it but how can I avoid this the only way to avoid is just tell customers no I'm not taking that check well we can't tell customers out we're done as a bank if that's what we say no so we just live with it too bad and the thing is two days from now when we go now I get to write that off somebody else comes in make another deposit and we've got this again while that sent away we've always got check items in the process of collection there is always a certain number of thousands of dollars or whatever that we have just got sent you know we're sitting around waiting while this cheque is out of our possession it's gone away and now we're using images these and this process is sped up back in the old days I'm gonna say 30 40 years ago he's had to be physically moved across the country now I'm not the ones locally within your town but 30 40 years ago they would bundle these up take them out to the airport put them on an airplane fly them to st. Louis or Chicago or Philadelphia wherever your Federal Reserve Bank was and if there's snow and that plane doesn't take off then you're just sitting there hoping they get the runway cleared off and it would slow this process down of these checks items in the process of collection and the further it is away the more problem you have with I don't know whether it be snowed in runways or whatever delays bad weather that's so now we've gone to the imaging and it speeds all this stuff up but we still have check items in the process of collection for a short amount of time liquid asset earns no interest see correspondent balances at other banks usually but not always not always but usually there's some small bank the bank we're talking about here as it turns out and the small Bank goes to a bigger Bank and says hey could you help us with something well what would that be and the answer is the something will emerge in the course of that discussion could be anything at all but the basic problem is this if we have this Bank that's a modest size I don't know 50 hundred million dollars on assets it's a pretty unsophisticated operation and it's not like we're not smart enough to do it it's just that it's too costly for us to produce certain services in-house and so we might go to another bank and say I know you're doing this or that all the time would you help us and do that for us now let me give you two examples of what that might be it might be cheque clearing it might be that we say hey we've got some checks depositors gave us checks we need to send those away to have them collected this bank is always doing this this big bank across town they're always doing that kind of stuff let's hand our checks over to them and they have a department to do this they got all the machinery and the computers and things like that and they can do this for us yes we could send them the way to the Federal Reserve but we could send it this Bank and they can do the same thing as a Federal Reserve and maybe at a lower fee and so that might be something we want the big bank to do for us a service here's another service that is very common something called loan participation you know we've talked before about risk and how we can reduce risk by diversifying if you're running this small Bank hundred million dollars in assets in a modest-sized town and you're thinking I'm making loans but
osh all these loans are kind of being made here in my town maybe or in this county not geographically diverse very much I kind of wish I could loan on the east coast or the west coast or further away is South America I wish I could diversify my risk not be making all my loans in a small area but that's hard to do so we might go to this big bank and say hey I heard that you're lending money to General Electric then their headquarters over on the East Coast or I heard that you're making loans to the government of Brazil and the banker says yeah that's true and then you might say to them you how about like letting me share a little bit of this action you're having the action would be how much you lending to Brazil all billion dollars well would you be willing to let me have one million dollars of action out of that billion dollar loan and what this banker is thinking we are thinking at our little Bank we cannot afford to put a loan officer out there and like pay for their transportation and pay for all their traveling expenses you know like the food and a hotel and stuff like this we can't afford that if we were just gonna like lend a million dollars because let's face it if you went to Brazil and spent a week there and made a few calls on somebody and said we were successful I mean we made the loan and you there's no guarantee of success but if you were successful maybe you spent $5,000 then if you spent five thousand bucks to book this one million dollar loan that's kind of a lot and this banker here might send somebody down to Brazil and make a billion dollar loan a thousand times as big as our 1 million dollar loan and even though it's a thousand times as big maybe they only spend ten times as much money making now alone so we say to them hey how about letting us have a little bit of that action they say ok how much do you want one two five ten twenty million dollars fifty million that was however much you want and we say one man's enough well here's the deal when our small bank needs services that we cannot produce internally cannot efficiently produce internally and some big bank is doing it we can go to them and say we'd like to work something out with you and the big bank says you know we'd be willing to work something out with you but we kind of like to have an ongoing relationship with you and we say okay because I need to keep on clearing checks I need to participate in some loans there can be other things as well and so the big bank says let's sit down here and kind of talk about what we think might happen over the next year and we talked about it and the big banker might say you know from all these things we've talked about I think I would be probably charging you about $10,000 as a fee for all these things let's use an easier number $5,000 I might charge you $5,000 as a fee for all this but I'm not going to charge you a fee I normally have to pay about five percent to attract money that's this big banker talking I know I might have to pay about five percent to attract money so I'll tell you what if you had a hundred thousand dollars just sitting here on my bank and you never took it out you just left it alone then I'd be kind of getting I'd be the equivalent of me giving you these services and that would be the equivalent of me getting about or paying about five percent I'd be giving you five thousand dollars of the services on a hundred thousand dollar deposit I'd be about the equivalent of me paying five percent for funds and so the banker says to us is the big banker says I'll tell you what you do you make a deposit of a hundred thousand dollars and you just leave that there your all the year round we're not going to give you a Penny's worth of interest and then as these kings come up we'll give you these services and we have talked it over and we've kind of made some estimates now if you need other services you let us know and now to be fine and we can adjust this balance that you need to maintain at the bank we can adjust that as we go and so if something comes up like for example you hire some new employee and they're gonna be a loan officer and they don't have the experience and we're teaching our loan officers you know send them to some school or maybe in-house we have a school for them you can send your employee over that's okay we'll just work it out as we go we're pals or cooed at all and so anyway that's it this is called correspondent banking this bank that receives the deposit is the correspondent and the bank that receives services and makes a deposit is the respondent bank now those services I mean this doesn't all happen at the same moment what happens is when we shake hands on the deal then the deposit is made boom at that moment and now we have the relationship and then these services will be delivered off and on throughout the year okay so anyway back to our story this Bank that we're talking about we're managing this small Bank we needed correspondent services and so we are the ones that opened the account put the deposit in the other Bank and now at that point we have a deposit at another Bank we can have it back whenever we want we could just call them up and say hey you know how we got that deal and get the money back because this is like a checking account so it is liquid if we want it but we are not earning interest we're getting back services okay now let me just mention a couple of things to go with this story and the one is this it doesn't have to be small back big bank they can be the same size it could be that a big bank makes a has a correspondent account with a small bank anything can't happen okay it's this deposit and the provision of services in return that defines the correspondent relationship regardless of the size of the bank the other thing I would say is this virtually every bank in the United States and I am just saying we don't see this we're retail customers we walk in we make a deposit we get a car loan or whatever and that's all we see of the bank but behind the scenes virtually every bank in the United States is either a correspondent or a respond or both you could have a bank in Springfield Missouri that opens a correspondent account with a bank in st. Louis Missouri and the Springfield banks a respondent the st. Louis bank is a correspondent but then this st. Louis bank may be sins a deposit off to a New York bank or a Chicago bank and get services in return and in that transaction this is the respondent bank and the bank in New York or Chicago be the correspondent and so what we have is this network of banks behind the scenes that connects now every bank is connected to every other bank but every banks connected to this correspondent role network someplace or another okay one of the things I already mentioned to you is this is that banks can purchase Fed funds from other banks you remember the borrowing of dollars that's one thing that happens it may be that the respondent says to the correspondent he we sometimes have just money sitting around and we're not earning interest if we get some of that could we just send that to you and you pay us interest that is could we sell Fed Funds to you and that bank says any day oh you do you just sent them to us just assume it automatically you have to call me up every day at 4 o'clock every day if you've got any money any Fed Funds you want to sell us you just tell the Federal Reserve to transfer it over and send us a note in this network that we have you just send us a note we know exactly what it is that'll be our regular deal and that could be a part of this whole relationship as well so this is going on all the time questions about this so what we have is liquid assets no interest and for the most part these things are pretty regular here it's like we've got a correspondent account we know how much that is a hundred thousand dollars or a million dollars or whatever it'll be and that just sets there this is a certain percent of just the deposits that are coming in this is a certain percent of the deposits that come in that we have to set aside this is the one though where that and I'll go back to the example somebody comes and make a deposit of $100 we have to set up side 10 now we got 90 in excess reserves and for one minute we got excess reserves and I'm saying that is the one that we can avoid this is avoidable these really aren't the others a 1 and B and C you we really need these as a part of doing business and these are avoidable these excess reserves so in most cases by the time the day is done we're rid of them did you get that by the time the day is over we're rid of these things we do not like excess reserves they're just sitting around taking up space now how do we get rid of them I'm glad you asked let's go to category 2 banks have to be liquid right two reasons and by the way we just talked about some liquid assets banks have to be liquid for two reasons one is this when people make a deposit we're promising him you can have your money back now we gotta live by that promise if we take somebody's deposit and say well you can have your money back anytime you want and then they come in and go hey I put $1,000 in my account last week could I have that and you go no I'm sorry we just don't have it what I need that I was counting on it and we're counting on that right if you've got rent to pay or whatever you got expenses insurance payment to make and you put that money in the bank and you thought you could go by and get it and they just say no now you can't make a house payment now you can't pay your insurance bill that relationship is just damaged forever and so that Bank has to do that they can't just go oh come back next week we'll be better off then no no no so that's the first reason banks have to be liquid to satisfy these people the second reason they have to be liquid as this and we're not to it yet but where they make their big profits is making loans and they always want to say yes if a good customer comes in says I won't borrow some money they always want to say okay have a seat they don't want to go gosh I'm sorry if I had money I'd lend it to you but I just don't they never want to say that ever because you know what that person does a person is okay by person or company and they go across the street and borrow the money over there and then they have a relationship with that bank over there and that's where they go from now on you always want to say well sure so what I'm saying is this the bank has to be liquid has to now these were liquid assets the primary reserves three of those four items that I mentioned and though a 1 and B and C three of the four are liquid but we really can't do much about hand those over to somebody else we kind of have hold on to that liquidity we still need some liquid assets okay and so these secondary reserves are liquid assets but they this is our no interest but they earn interest earned positive interest let me give you a few examples and I don't mean for this to be everything possible but a few examples sell Fed Funds you've heard about Fed Funds before here's sort we talked about Fed Funds earlier we said that if a bank wants to borrow some dollars obtain some funds they could purchase Fed funds and get dollars from another bank true but now we're talking about if a bank has some dollars and they want to put those dollars to work one place they can put them to work is lend them to another Bank on an overnight basis right one day and you're transferring funds that are at the Federal Reserve that's why they call them Fed Funds these are funds on the books of the Federal Reserve for an overnight basis and they're unsecured there's no collateral okay so let me go back I told you if somebody makes a deposit and we say oh we've got excess reserves if you've got no place else to put those excess reserves don't hold on to excess reserves before the day is over sell Fed Funds to another bank say hey you want some funds and there's some Bank out there says I sure do and even if you can't find some Bank that does you call your correspondent up and you say hey you know we got a deal where I can sell Fed Funds on the bankers that I told you don't bring that up all the time of course I will just transfer them to me I'll pay you and of course that Bank wall if it doesn't need them will sell Fed funds to another Bank these dollars are just snapping around the country we're talking it could be of any amount but we're talking of a Fed Funds market that's billions and billions and billions of dollars it's very efficient and dollars flow very quickly so anyway these are illiquid assets we can have the money back tomorrow and they're earning interest that's better than a liquid asset that earns no interest that is to say the what excess reserves setting at the Federal Reserve or setting in the vol just doing nothing don't get rid of those so them to another bank here's another possibility well I mean two of these before I go on there's Fed Funds of two types that overnight or the one day and that's typical but there's also such a thing as term Fed Funds and the term Fed Funds have a maturity date a week a month a year laying out of here in theory any maturity whatever is agreed on but anyway usually not a long term okay no collateral though here's another possibility we've used this term in another way before so here we are again using that term in a slightly different way suppose you think this I've got some cash in the ball there excess reserves I want them to put them to work I want to sell fed funds to another bank but gosh I don't know if that other Bank is safe I don't know if I'm gonna get my money back Fed Funds transactions had no collateral I'll just loan you that money for one day you pay me back tomorrow and then we'll just start rolling them over what are gonna get my money back so I might want collateral and so what I could say to you is this hey want to purchase fed funds and you say okay another bank says okay and I say just a second I want you to give me some collateral that banker says okay but then that other banker says just a second we've got a definition of Fed Funds you own me the money I give you no collateral that's on collateralized now they don't say it that way but Fed Funds no collateral so what we'll say is something like this tell you what I'll do I'll give you let's say a hundred thousand or a million I'll give you a hundred thousand dollars or the federal funds bed funds you give me some Treasury bills as collateral I'll hold on to that Treasury bill and then tomorrow or next week or whenever it is that we get done with our deal you pay me what you owe me plus interest and I'll give back your collateral now that is a Fed Funds transaction with collateral but they don't call it Fed Funds transaction with collateral here's what they call it a repurchase agreement because here's another way of looking at the same transaction here's $100,000 I will purchase some Treasury bills from you and then in a week or a month or whatever it is you repurchase these Treasury bills from me they are back and now you give me a thousand dollars plus interest and so it was a repurchase agreement but all that amounts to in this particular case is collateralized Fed Funds transaction so these are both Fed Funds deals okay anyway I can get rid of this money and understand I don't have to set around a secondary or with excess reserves I can get rid of that money for the days over other things to do with it would be something like this purchase Treasury bills these are just a short-term kind of a Treasury bond but they're called Treasury bills they're very short-term from the longest I mean Treasury bills when they're issued either have a three-month six-month or a 12-month maturity there is none of them long term and then if we buy one that's already been out there for a while it has an even shorter period of time until it matures right if I buy a three-month Treasury bill that's been in circulation already for two months now it only has one month they go to maturity or how about this one I could purchase a negotiable CD issued by another bank CD certificate deposit maybe there's some big Bank a Citibank or the Bank of America and they've got some CDs and are in circulation out there I could buy one of thos
set around hold on to it or in some interest if I ever want to I can sell it for cash I want liquid assets here because I need to be liquid I always have to say yes to the depositor once we withdraw money I always have to say yes if I want to make a loan so I need some liquid assets but I could hold and this is really not much different than just the idea of a bond I can old a CD should buy some other bank how about this one purchase commercial paper commercial paper is issued by an industrial company or a financial company and it's kind of like kind of like but not exactly but kind of like a bond and it's got some amount up here like let's say a hundred thousand dollars and there will be some interest rate of I don't know three percent and then there will be some maturity date six months hints on it and maybe this is issued by I don't know a utility company or maybe it's issued by my I don't know GE Capital is that it some financial company and what happens is there's somebody an industrial company or some financial company and they say we need some funds they need funds and they print up their own IOU so to speak commercial papers what this is called and then they say hey we have this commercial paper for sale and so our bank we've got a little bit of liquidity here our bank can go out and buy some of this commercial paper now we're holding on to this and we're getting interest so it's satisfies this requirement here of earning interest it's liquid because it's issued by a fairly big company we can sell this thing and it's also liquid because it has a short maturity the maturity is always less than nine months by law for this commercial paper if its maturity is nine months are over it qualifies as a bond and there are all kinds of other Securities and Exchange Commission SEC restrictions on it and so these are always short-term that adds liquidity and then they're marketable and that as liquidity issued by big companies that adds liquidity to it okay guess what these are not very much different from each other this is kind of like the IOU of the Treasury and they're borrow money for short periods of time and pay an interest and this is the IOU of another Bank and they're borrowing money for a short period of time and it's liquid we can sell it to somebody and this is the IOU of an industrial company or a financial company and they are borrowing and paying interest and we can sell it these are all very similar to each other and by the way these are also the kinds of things and we haven't talked about it but a money market mutual fund a money market mutual fund is taking money of investors and investment in liquid assets exactly these kind of things right here this is what money market mutual funds investment this is what banks invest in or purchase when they need to be liquid we could add more things here but I'm not going to continue with this list these are the important ones so basically what I'm saying is this banks have to be liquid no question so they hold liquid assets they do not like to hold liquid assets that are no interest so the extent possible they get rid of those excess reserves and tie their liquidity up in secondary reserves if they need liquidity and so this is the kind of stuff that they do with their money okay now there's a certain point where the bankers have all the liquidity they need let's finish up with this little point right here an animal stop bankers get all the quiddity they need with primary reserves and secondary reserves whatever they need they need but you can never count on how much liquidity you need so you always got to have some after you've got all the liquidity you need that's reasonable then what you say is this okay you know I've got that nailed I've got that taken care of now my next consideration is profit and the most profitable thing I can do I'll put a star up here the most profitable thing I can do is make loans so what I want to do is lend all the money I can that I believe will be paid back I want to make as many loans as I can and so when we go back to this deal again a deposit comes in we hold the required reserves if there are any excess reserves yes well hold secondary reserve if we need it but if we don't need any more liquidity then what we do is we just say hey excess reserves let's make loans and this is of all those dollars coming into the banks this is about sixty five percent of all of the funds coming into banks two thirds practically ends up as loans and this is the most profitable category of bank assets we're going to talk about loans next time so long
