"Liquidity" redirects here. For the accounting term, see Accounting liquidity.
In business, economics or investment, market liquidity is an asset's ability to be sold without causing a significant movement in the price and with minimum loss of value. Money, or cash on hand, is the most liquid asset. An act of exchange of a less liquid asset with a more liquid asset is called liquidation. Liquidity also refers both to a business's ability to meet its payment obligations, in terms of possessing sufficient liquid assets, and to such assets themselves.
Banking
In banking, liquidity is the ability to meet obligations when they come due without incurring unacceptable losses. Managing liquidity is a daily process requiring bankers to monitor and project cash flows to ensure adequate liquidity is maintained. Maintaining a balance between short-term assets and short-term liabilities is critical. For an individual bank, clients' deposits are its primary liabilities (in the sense that the bank is meant to give back all client deposits on demand), whereas reserves and loans are its primary assets (in the sense that these loans are owed to the bank, not by the bank). The investment portfolio represents a smaller portion of assets, and serves as the primary source of liquidity. Investment securities can be liquidated to satisfy deposit withdrawals and increased loan demand. Banks have several additional options for generating liquidity, such as selling loans, borrowing from other banks, borrowing from a central bank, such as the US Federal Reserve bank, and raising additional capital. In a worst case scenario, depositors may demand their funds when the bank is unable to generate adequate cash without incurring substantial financial losses. In severe cases, this may result in a bank run. Most banks are subject to legally-mandated requirements intended to help banks avoid a liquidity crisis.
Banks can generally maintain as much liquidity as desired because bank deposits are insured by governments in most developed countries. A lack of liquidity can be remedied by raising deposit rates and effectively marketing deposit products. However, an important measure of a bank's value and success is the cost of liquidity. A bank can attract significant liquid funds, but at what cost? Lower costs generate stronger profits, more stability, and more confidence among depositors, investors, and regulators.
Business
In business, the term refers to a company's ability to meet its obligations when and in the event they fall due. If a firm is unable to meet its obligations in time, the company is in danger of insolvency. Therefore, emphasis is put on financial planning by the controlling staff in order to register all potential shortages in funds. If there is a shortage, the Treasury will be informed in order to be prepared to raise capital for the next business period. If a shortage of funds is registered too late and the funds are insufficient, banks may reject lending a company capital, and in consequence bankruptcy might be inescapable.
In business, merchants often have liquidation sales, in which inventories are sold at discount to raise cash or to get rid of inventory more quickly.
In business, economics or investment, market liquidity is an asset's ability to be sold without causing a significant movement in the price and with minimum loss of value. Money, or cash on hand, is the most liquid asset. An act of exchange of a less liquid asset with a more liquid asset is called liquidation. Liquidity also refers both to a business's ability to meet its payment obligations, in terms of possessing sufficient liquid assets, and to such assets themselves.
Banking
In banking, liquidity is the ability to meet obligations when they come due without incurring unacceptable losses. Managing liquidity is a daily process requiring bankers to monitor and project cash flows to ensure adequate liquidity is maintained. Maintaining a balance between short-term assets and short-term liabilities is critical. For an individual bank, clients' deposits are its primary liabilities (in the sense that the bank is meant to give back all client deposits on demand), whereas reserves and loans are its primary assets (in the sense that these loans are owed to the bank, not by the bank). The investment portfolio represents a smaller portion of assets, and serves as the primary source of liquidity. Investment securities can be liquidated to satisfy deposit withdrawals and increased loan demand. Banks have several additional options for generating liquidity, such as selling loans, borrowing from other banks, borrowing from a central bank, such as the US Federal Reserve bank, and raising additional capital. In a worst case scenario, depositors may demand their funds when the bank is unable to generate adequate cash without incurring substantial financial losses. In severe cases, this may result in a bank run. Most banks are subject to legally-mandated requirements intended to help banks avoid a liquidity crisis.
Banks can generally maintain as much liquidity as desired because bank deposits are insured by governments in most developed countries. A lack of liquidity can be remedied by raising deposit rates and effectively marketing deposit products. However, an important measure of a bank's value and success is the cost of liquidity. A bank can attract significant liquid funds, but at what cost? Lower costs generate stronger profits, more stability, and more confidence among depositors, investors, and regulators.
Business
In business, the term refers to a company's ability to meet its obligations when and in the event they fall due. If a firm is unable to meet its obligations in time, the company is in danger of insolvency. Therefore, emphasis is put on financial planning by the controlling staff in order to register all potential shortages in funds. If there is a shortage, the Treasury will be informed in order to be prepared to raise capital for the next business period. If a shortage of funds is registered too late and the funds are insufficient, banks may reject lending a company capital, and in consequence bankruptcy might be inescapable.
In business, merchants often have liquidation sales, in which inventories are sold at discount to raise cash or to get rid of inventory more quickly.
