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Money at call and short notice with the discount houses.
Money at call is the main reserve that banks draw on if they are short of cash.
The most liquid of the market loans are money at call and short notice lent to the discount houses.
Money at call is money which can be withdrawn at only a few hours' notice.
They pay a slightly lower rate of interest on money at call than they earn by discounting bills.
The discount houses provide an important service to the banks by allowing them to hold extremely liquid assets (money at call) which nevertheless earn interest.
If the commercial banks are short of cash they will recall some of their money at call or short notice from the discount houses.
Cash flow for this purpose is provided by overnight and short-term 'money at call' lent by the banking sector.
For, it requires banks to keep money at call with the discount houses to a minimum of 2% per cent of their eligible liabilities.
To do this they obtain money from the banks by borrowing money at call and short notice and by selling them bills.
We have seen earlier that the banks were able to substitute other liquid assets (money at call, commercial bills) as the supply of Treasury bills contracted.
These reserves included balances with the Bank of England, money at call, bills of exchange and government bonds with less than one year to maturity.
The fact that banks hold a number of fairly liquid assets, such as money at call, bills of exchange and short-dated bonds, makes it difficult to identify a simple liquidity ratio.
The discount houses will thus try to economize on the bills they offer to the Bank by, say, offering a higher rate of interest on money at call, and thus encouraging further such deposits from the banks.
They borrow from the banks for as little as a few hours' notice of recall by the banks (money at call), and lend to the government, local authorities and firms for typically three months (bills of exchange).
If £1 billion of Treasury bills are sold to the discount houses, the discount houses will borrow money at call from the banks, or sell bills to the banks, to pay for these Treasury bills.
Thus although the Bank of England has been obliged to restore the amount of cash it had withdrawn from the system, there has been an equal and opposite decrease in bills plus money at call held by the banks.
If, for example, there was excess demand for short-term loans (like money at call) and excess supply of money to invest in long-term assets (like bonds), short-term rates of interest would rise relative to long-term rates.
At the same time, if discount houses ran the risk of borrowing at a new higher MLR they would try to borrow more money at call and would be prepared to pay a higher rate of interest to do so.
The discount houses would then be obliged to pay whatever level of interest was required to prevent banks' demanding money at call, i.e. that rate of interest on call money which persuaded banks not to use this route to increase their balances at the Bank but to forgo instead their intention of increased lending.