What is the bank's liquidity?

When a bank is able to fulfill itsobligations, such a concept is called the liquidity of the bank. Bank liquidity depends on the degree of risk of operations. That is, the more assets with high risk on the balance sheet of the bank, the lower the liquidity of the bank. High-risk assets include, for example, long-term investments of a bank. The less risky assets include cash in a bank note. The degree of creditworthiness also greatly affects the liquidity of the bank, including the timely return of the loan.

And, the liquidity of the bank's balance depends onbalance sheet structure. For example, demand deposits can be received by depositors at any time, and time deposits are carried out by banks for a longer time. Therefore, the liquidity of the bank can significantly decrease if the share of demand deposits is increased and the share of term deposits is reduced. The level of liquidity can also be influenced by a factor such as the reliability of loans and deposits that have been received from other lending institutions by the bank.

Assessing the solvency and liquidity of the bank,you can determine how the bank works. And you can evaluate using special indicators that reflect the ratio of liabilities and assets, as well as the structure of assets. At the international level, special liquidity ratios, which are the ratio of assets and liabilities, are used. Liquidity indicators in different countries can have different methods of calculation and name. All this depends on the fact that each country has its own practice and traditions. To assess the liquidity of the bank, it is necessary to apply the coefficients of medium-term and short-term liquidity. In some banks, the liquidity rate is determined by the banking legislation, and in others it is established by the bodies of currency and bank control. The level of ability to fulfill the obligations of the bank is determined through comparison with the established norms and with the value of the coefficient of this bank.

The bank's obligations distinguish potential andreal. The potentials are expressed by passive off-balance sheet transactions, for example, bank guarantees and guarantees issued by the bank. Also, potential liabilities include off-balance sheet active operations, for example, issued letters of credit. Real liabilities can include such a balance of the bank, which is expressed in the form of deposits of urgent and on demand, funds of creditors and borrowed funds. To fulfill these obligations can serve as sources of funds that are expressed in the balance of cash on hand, assets that go into cash and other sources. In the use of these sources, the bank should not be accompanied by losses.

The liquidity of a bank can be defined asa dynamic state that reflects the ability to fulfill its obligations directly to depositors and creditors by managing its own assets and liabilities. Solvency is organized on a specific date, unlike liquidity, for example, when wages are paid to employees or when taxes must be paid to the budget. The relationship between the solvency and liquidity of the bank leads to such a situation that the bank can not fulfill payment obligations and can remain liquid. A loss of liquidity leads to systematic insolvency. Such a concept can mean, as the bank's inability to find sources for repaying the debt and its obligations in the internal structure, and the inability to attract other external sources to repay the obligations.

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