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- If a bank is suddenly faced with an unexpected outflow of money through large withdrawals, credit disbursements, or market instabilities it may become significantly less liquid. It may also be exposed to risk if for example, any markets it depends on are subject to their own loss of liquidity.
www.ir.com/guides/understanding-liquidity-in-banks
Jul 17, 2019 · Overall, these results suggest that large banks are likely to change their mix of liquid assets and liabilities holistically in response to shrinking reserves, rather than simply adjusting excess reserves and Treasuries.
Banks create liquidity by having enough funds (cash deposits) in reserve to allow depositors to withdraw money on demand. Liquidity creation becomes compromised when problems occur between the funding and the asset side of the balance sheet.
If banks allocate their balance sheet by equalizing the marginal risk-adjusted expected return across asset classes, they hold more liquid assets when they have less advantageous lending opportunities. We show that, indeed, holdings of liquid assets are negatively related to lending opportunities.
Jul 12, 2019 · However, after becoming compliant, many such banks adjusted their liquid asset holdings, reducing their stocks of reserve balances and raising their holdings of other HQLA components, presumably to achieve a more optimal configuration.
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.
We show that the portfolio motive helps explain the large holdings of liquid assets of banks. With this motive, post -GFC increases capital requirements that make holding loans less profitable relative to holding liquid assets help explain why banks hold so much liquid assets after the GFC.
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Why do banks hold liquid assets on the balance sheet?
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Aug 21, 2019 · Since 2015, regulators have required certain banks to hold minimum levels of high-quality liquid assets (HQLA) in an attempt to prevent the acute liquidity shortages that precipitated the 2007–08 financial crisis.
