Definition

Shiftability theory

Shiftability theory is developed in 1918 by M.G Mouton and published on his article named ‘Commercial banking and capital formation.

Central theme:

  • Bank must arrange portfolio in such a way that it can have desired liquidity.
  • Most investment is made in secondary money market securities so that liquidity can be achieved at a little/very insignificant amount of loss of value.
  • Here investment money market securities includes, treasury bill, commercial paper and securities issued by reputed companies.
  • Bank can also get cash from central bank in case of difficulty simply by keeping the instruments as security.

The shiftability has reduced the necessity of holding reserve of huge amount of idle cash balance. It has presented an alternative way of real bill doctrine/theory where there is possibility of risk because of economic depression in the case of buying and selling of commercial goods and raw material. With the help of shift ability theory the probability of income can be increased and the probability of risk can be reduced.

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