Bank Liquidity
Bank liquidity refers to the availability of cash or easily convertible assets to meet short-term obligations.
Meaning in Practice
In practice, bank liquidity consists of central bank reserves, cash, and high-quality liquid securities. Institutions maintain liquidity buffers to manage deposit outflows and funding maturities. Liquidity management is a core function of treasury operations.
Why It Matters
Adequate liquidity ensures smooth payment processing and operational continuity. It protects banks from short-term funding shocks and supports market confidence. Strong liquidity positions enhance resilience during financial stress.
Market Impact
Higher system-wide liquidity generally lowers short-term interest rates and supports lending activity. Conversely, liquidity shortages can tighten financial conditions and increase volatility. Central bank interventions often target liquidity stabilization.
Example
A bank holds government bonds that can be quickly sold or pledged as collateral to obtain cash if needed to meet withdrawal demands.