Question

Explain why banks hold more cash than do most businesses.

Answer 1

Banks are the basic intermediaries in the whole financial system. They perform the task of fund transporation between the savers and investors. Banks pay interest to the account holders and mobilise those funds in the form of loans to interested stakeholders. They have to comply with the reserve requirements and capital adequacy ratios too. This nature of business demands them to maintain huge amount of cash not just as a buffer but to provide cushion in the times of liquidity crisis. Other businesses cash requirements are comparitively low since they are not maintaining deposits on account of public. That is why, the banks are required to hold more cash than do most businesses.