Money at Call and Short Notice

Background

“Money at call and short notice” refers to funds that are lent by banks, typically to other banks or financial institutions, which are highly liquid. These funds are usually secured loans bearing interest, generally at lower rates, and can be recalled by the lender on demand (call) or within a short time frame — up to 14 days (short notice).

Historical Context

The concept of “money at call and short notice” has its origins in the UK banking sector, serving as a crucial liquidity reserve for banks. This practice emerged prominently during periods where banks needed flexible means to manage their liquidity without holding excessive cash reserves.

Definitions and Concepts

• Money at Call: Funds lent, typically, to other banks or financial institutions, which can be recalled or demanded back without prior notice.
• Money at Short Notice: Similar to money at call but requires a short notice period, up to 14 days, for recall. This short notice period provides borrowers a brief time to arrange alternative funds.

Major Analytical Frameworks

Classical Economics

Classical economists focused on the roles of savings and investments in economic growth but typically did not explicitly delve into the micro-mechanisms of banking reserves and liquid assets.

Neoclassical Economics

In the neoclassical framework, “money at call and short notice” represent an essential part of bank portfolios in maintaining efficiency in liquidity management, pricing of risk, and interbank loan interest rates.

Keynesian Economics

Keynesian theorists emphasize bank’s liquidity preferences. “Money at call and short notice” plays a significant role in meeting liquidity demands while ensuring borrowable funds remain flexible and ready at minimal notice.

Marxian Economics

From a Marxian perspective, banking mechanisms like “money at call and short notice” reflect broader dynamics of capital fluidity within capitalist systems, serving as tools for managing the cyclic crises in financial sectors.

Institutional Economics

Institutional economics would likely examine the roles of regulatory frameworks and banking standards that guide the use, security, and interest rates of call money and short-notice funds.

Behavioral Economics

Behavioral economists might study this area to understand how decision-making processes in banks regarding liquidity reserves are influenced by psychological factors, informational asymmetry, and market perceptions.

Post-Keynesian Economics

Post-Keynesians would analyze how these forms of highly liquid assets affect overall monetary stability, the possibility of financial instability, and policy measures that ensure robust banking operations.

Austrian Economics

For Austrians, the emphasis would be on how the free market determines the rates and volumes of “money at call and short notice” lending, arguing for minimal governmental intervention in such banking operations.

Development Economics

In developing economies, ensuring adequate “money at call and short notice” reserves may play a critical part in institutional robustness and economic resilience, often amid more significant market volatility.

Monetarism

Monetarists are particularly concerned with the role of such liquid funds in influencing money supply, interest rates, and broader economic outcomes.

Comparative Analysis

Comparing “money at call and short notice” across different financial systems indicates various levels of reliance and strategic utilization. Systems with more developed interbank markets often heavily utilize these instruments due to their ease and flexibility in liquidity management.

Case Studies

• Financial Crisis of 2008: Examination of how liquidity crises pointed out the need for innovative liquid asset management, including the implications for “money at call and short notice.”
• Bank of England: Historical practices from the Bank of England on setting standards and norms for lending at short notices.

Suggested Books for Further Studies

1. The Economics of Money, Banking, and Financial Markets by Frederic S. Mishkin
2. Money and Banking: What Everyone Should Know About the Money System by Ankit Lakhotia
3. Money, Banking, and Financial Markets by Stephen G. Cecchetti and Kermit L. Schoenholtz

Related Terms with Definitions

• Liquidity: The ability of an asset to be quickly converted into cash with minimal loss of value.
• Discount Houses: Financial institutions that specialize in discounting bills of exchange, serving as intermediaries for short-term funding.
• Interbank Lending: The process by which banks lend to one another to manage liquidity and funding needs.
• Secured Loan: A loan backed by collateral to reduce the risk for the lender.