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Aug 22, 2024 · The essence of liquidity risk lies in the mismatch between assets and liabilities, where the assets can't be easily liquidated at market value to meet the short-term obligations.
- Will Kenton
This paper is organized around the following questions: • What is liquidity at a bank? • Why do we care about it? • Why are banks prone to runs? • How can banks achieve adequate liquidity? • How...
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Jul 12, 2019 · Liquidity management—ensuring access to sufficient quantities of assets that can be converted easily and quickly into cash with little or no loss of value—has always been a key component of banks' balance sheet management.
When asset values deteriorate and monetary policies become tighter, it increases liquidity risk for banks. With a history of bank failures due to inadequate balance sheet management, commercial banks are now required to manage their liquidity risk through effective asset liability management (ALM).
Meanwhile, liquidity problems arise due to interactions between funding and the asset side of the balance sheet — when a bank does not hold sufficient cash (or assets that can easily be converted into cash) to repay depositors and other creditors.
May 18, 2024 · Liquidity refers to the ease with which an asset, or security, can be converted into ready cash without affecting its market price. Cash is the most liquid of assets, while tangible items...
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While it is generally agreed upon that banks undervalued liquidity prior to the recent financial crisis, one must also consider the tradeoff between resilience to liquidity shocks and the cost of holding lower-yielding liquid assets as the latter may impact banks' ability to generate revenues, increase capital and extend credit.
