These shares of stock are called owner s equity or the net worth of the bank. They also must buy shares of the Federal Reserve bank in their Federal Reserve district. As we mentioned before, banks are required to set aside money or hold it in reserve. This is a certain percentage of their deposits. The required reserve ration is the minimum proportion of deposits that the bank must hold in reserve.
Banks have to meet two conflicting objectives, liquidity and profitability.
Banks typically find that the assets offering the highest interest tend to be less liquid than other assets with comparable risk. The most liquid asset is bank reserves, but reserves earn no interest. If the bank plays it too safe, it earns no income and goes bankrupt. If they tie up funds in unliquid assets, they have liquidity problems. The bank manager must strike a balance between liquidity, safety, and profitability.