Final answer:
A $3,500 decrease in the bank's cash position does not necessarily indicate a fall in liquidity; it could be due to strategic asset allocation or income-generating loan issuance. Bank balance sheets include loans as assets, showing that not all deposited cash is kept in reserves due to the principles of fractional reserve banking.
Step-by-step explanation:
Although a decrease of $3,500 cash at bank might suggest that liquidity has fallen, this assertion could be incorrect for a couple of reasons. Firstly, the reduction in cash could be due to a strategic decision by the bank to invest in high-liquidity assets like Treasury bonds, which could easily be converted back to cash. Secondly, the decrease in cash could also be a result of the bank issuing more loans, which is typically how banks generate income through interest. If these loans are performing well and there is a low risk of default, the bank's financial position and liquidity might actually be stronger despite having less cash on hand.
Assets listed on a bank balance sheet may not actually be in the form of cash because banks operate on a fractional reserve banking system. Banks are required to hold a minimum amount of reserves, but they can loan out the remainder of the deposits they receive. In the scenario provided, Singleton Bank has $1 million in reserves, but has extended a $9 million loan to Hank's Auto Supply, with total deposits still standing at $10 million. This illustrates how banks create loans which are accounted for as assets, despite not physically having the full amount of deposited cash on hand.