Four questions of Banking Essay Example | Topics and Well Written Essays - 2000 words

Four questions of Banking - Essay ExampleA bank which cannot fulfil the obligations is give tongue to to be illiquid. If such a case arises then the bank is said to have defaulted which causes the shareholders and the depositors of the bank to start out heavy losses. Funding liquidity put on the line on the other hand is defined as the probability that the bank wont be up to(p) to pay its obligation in a legitimate time current in future. So there exists a major difference between the twain concepts of funding liquidity and funding liquidity risk. Funding liquidity has only two possible outcomes, i.e. every the bank would be able to pay its liabilities or the bank wont be able to pay its liabilities at a particular time in future. Funding liquidity risk on the other hand can have infinite possible outcomes depending on the distribution of future incomes. It is pass out over a time period not a particular time. As per the theoretical comment of funding liquidity a bank can b e said to be liquid as long as the outflows is less that the inflows and the stock of money held.The market liquidity is a function of third different perspectives. The most popular and crudest measure is the shout-ask spread is called width. A low or narrow bid ask spread is said to be tight and reflects more liquidity in the market. Depth refers to the markets ability to absorb sale of a position. Another feature of the market liquidity risk is the resilience which refers to the markets ability to bounce back from temporarily incorrect prices.In period 2 banks can therefore not only trade in interbank market but excessively obtain liquidity either from depositors depositing money in the banks or by selling assets. Whereas deposits is considered as the subjective hedge against liquidity risk which arises out of the giving out loans, but the problem is that it not evermore possible for the banks to fetch new deposits by attracting new depositors. So inflow and outflow can be c onsidered to be