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Definition

Shiftability theory

Definition (1):

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

Central theme:

  • The bank must arrange a 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 include treasury bills, commercial paper, and securities issued by reputed companies.
  • Bank can also get cash from the central bank in case of difficulty simply by keeping the instruments as security.

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

Definition (2):

In banking, the shiftability theory is an approach to keeping banks liquid by encouraging the shifting of assets. When a bank has a shortage of ready money, it can repo or sell its assets to a bank that is more liquid. This approach lets the banking system move more efficiently with fewer reserves or investments in long-term assets.

 

 

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