Bank liquidity is a risk measurement involving the ability to meet near-term financial commitments, such as to pay bills, at a reasonable cost. More specifically, this closely managed metric measures of a bank’s ability to quickly convert its assets into cash in order to satisfy withdrawals from depositors and other fund providers.
Liquidity is central to a bank’s stability and solvency and is measured by ratios such as liquidity coverage ratio and the net stable funding ratio.
Primary sources of bank liquidity include assets, such as their cash reserves and securities portfolio, their operating cash flow as well as deposit and other wholesale funding liabilities. Facilities at the Federal Reserve and other short-term borrowings provide additional liquidity resources.
Managing bank liquidity is highly nuanced and overseen by regulatory bodies. The management of bank liquidity depends on a number of factors — business mix, balance sheet composition and prevailing economic conditions being chief among them.
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