Abstract

Exchange Reserves and Bank Liquidity

In attempting to determine exactly the effect of external economic influences on the banks’ supply of liquidity, often enough only the trend of exchange reserves with the central bank are considered. But as long as the banks’ shortterm foreign accounts receivable, that is to say, money exports, are not taken into account at the same time, any statement on liquidity changes must remain incomplete because either pure shifts in bank liquidity as between domestic and foreign investments are assessed as liquidity expansion or contraction, or liquidity effects stemming from foreign business are not covered at all. To avoid erroneous interpretations, therefore, official and private exchange accounts receivable must be considered together. The higher the share of money exports in a country, the greater will be the distortions. This is illustrated by the examples of the Federal Republic of Germany and Great Britain, which have very different structures. 1. From the statistical viewpoint, the total exchange reserves in Great Britain exhibit mostly only positive changes, that is, they have a permanent tendency to increase liquidity. In the Federal Republic of Germany on the other hand, there are changes in the total exchange reserves which exert both srongly expansive and contractive influences. The influence of the balance of payments as a market factor on bank liquidity is much less uniform in this instance. 2. The distribution of the total exchange reserves between the central bank on the one hand and the banking system on the other differs in these two countries. A comparison of absolute values shows that the exchange reserves of the Bundesbank are roughly 3 - 4 times as high as the money exports of German banks. In contrast, the official reserves in Great Britain make up only about one eleventh of the money exports of British banks. If we compare the changes, we find that the official exchange reserves in the Federal Republic of Germany are subject to much greater fluctuations than the money exports of German banks. From this it can be concluded that a substantial proportion of all exchange transactions are effected through the Bundesbank. In Great Britain the records show only slight, mostly positive changes in official exchange reserves, while there are more market changes in the money exports of British banks, which are likewise mainly increases. Whereas developments in the Federal Republic of Germany match up with exchange theory models, Great Britain does not fit into this pattern. Being a country with a continually weak currency threatened by depreciation, one would have expected a persistent decrease in British exchange reserves. It is true that the high British money exports match up with the model; but with relatively constant exchange reserves they can be carried out only if there are simultaneous high money imports, which are not really to be expected in a country where depreciation seems likely. This discrepancy between monetary theory on the one hand and British reality on the other can only be explained by the fact that London is the centre of the Euro-Dollar market and hence British liabilities in foreign currencies were always higher than accounts receivable in foreign currencies, making recourse to the central bank superfluous. For this reason the evidentiary value of the official exchange reserves alone for the trend of bank liquidity is still more dubious in Great Britain than in the Federal Republic of Germany.