BANKING AFFAIRS

Detailed explanation-1: -A bank has adequate liquidity when it can obtain sufficient funds either by increasing liabilities or by converting assets, promptly and at a reasonable cost. Liability is essential in all banks to compensate for the expected and the unexpected balance sheet fluctuations and to provide funds for growth.

Detailed explanation-2: -Internal factors affecting the liquidity of banks include the bank’s capital base, asset quality, deposit base, level and quality of management, balance sheet demand and liabilities, quality of securities and loan portfolio, peculiarities of the customer base, bank image, attraction of funds from external sources.

Detailed explanation-3: -In reality, banks have various ways to obtain liquidity. They can hold central bank reserves, borrow in the interbank market, borrow within their banking group, or simply invest in government bonds.

Detailed explanation-4: -Liquidity at a bank is a measure of its ability to readily find the cash it may need to meet demands upon it. Liquidity can come from direct cash holdings in currency or on account at the Federal Reserve or other central bank. More commonly it comes from holding securities that can be sold quickly with minimal loss.

Detailed explanation-5: -To remain viable, a financial institution must have enough liquid assets to meet withdrawals by depositors and other near-term obligations. Capital is the difference between all of a firm’s assets and its liabilities. Capital acts as a financial cushion to absorb losses.