Risk Assets

The term ‘risk assets’ is no more than a rough label for those assets that fall outside what, by today’s convention, are referred to as liquid assets. The two principal assets involved are ‘loans and advances’ and ‘investments’. Loans and advances may be said, unequivocally, to be more risky than liquid assets. As funds lent almost wholly to the private sector they carry less security than if they were lent to the state which, for the most part, is the case with liquid assets; while they are comparatively illiquid in that, although technically recallable on demand, in practice they can rarely be liquidated quickly. But to describe ‘investments’ as risk assets is more questionable. They consist today almost wholly of gilt-edged securities so that risk of default is absent. At one time—in the pre-1914 era —gilt-edged securities were normally classed as liquid assets; a combined total of government securities and money at call was frequently shown on balance sheets and the securities were regarded equally as a reinforcing of the cash position. At that time the liquidity of bonds was considered to reside in their ready marketability. Today, with a vastly increased volume of debt of all kinds, a separate element of ‘liquidity’ has come to be stressed more and more: this is freedom from risk of fluctuation in capital values. Gilt-edged securities with more than the shortest span of life to run are clearly subject to instability of value, and this, coupled with the high levels to which bank portfolios have climbed since the early 1930s, has caused them to be banished from the fold of liquid assets—at any rate by those who comment on financial affairs. The banks themselves have not departed quite so far from their traditional attitudes. ¹³⁰ They still regard gilt-edged securities as reinforcing their liquid position although now such reinforcement is regarded as proceeding to an important extent from a timed succession of maturities. Also, as far as the selling of securities before maturity is concerned, they would presumably admit that unless there was official support of the gilt-edged market, they could not divest themselves of large amounts of investments without seriously depressing the prices of these assets, and hence involving themselves in capital losses.