What is the bank's liquidity?

When a bank is able to timely fulfill its obligations, such a concept is called the liquidity of the bank. Bank liquidity depends on the degree of risk of operations. That is, the more high-risk assets on the bank's balance sheet, the less 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 influences the liquidity of the bank, including the timely return of the loan.

And, the liquidity of the bank's balance depends on the structure of the liabilities of the balance sheet. For example, demand deposits can be received by depositors at any time, and time deposits are made by banks for a longer period of 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 affected by such factors 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 are used that represent the ratio of assets to liabilities. 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 the bank.

The bank's obligations distinguish between potential and real. 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 to cash and other sources. In the use of these sources, the bank should not be accompanied by losses.

Liquidity of a bank can be defined as a dynamic state, which reflects the ability to fulfill its obligations, directly, to depositors and creditors due to the fact that it manages its own assets and liabilities. Solvency is organized on a specific date, unlike liquidity, for example, when wages are paid to employees or when it is necessary to pay taxes to the budget. The relationship between 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 paying off the debt and its obligations in the internal structure, and the inability to attract other external sources to repay the obligations.