Thursday, April 30, 2009

Asset liquidity of banks

The liquidity of an asset can be defined as being the ease and certainly with which it can be turned into money. The most liquid asset of all, therefore, must be money itself. THE next most liquid assets are called near-money, or secondary reserves, as contrasted with primary cash reserves. Secondary reserves are money market assets, such as treasury bills, which have no credit risk and have little market risk. that is, these assets will be turned into money within a year by reason of a short-term maturity date. if they need to be sold before maturity, there is little capital loss involved , inasmuch as the market price is not subject to wide fluctuations. All banks need such secondary reserve to protect against either regular or unexpected cash withdrawals. Furthermore, the higher the proportion of term loans (business loans of over one-year maturity) in the loan portfolio of a bank, the more urgent was the necessity, it was thought, for that bank to have an adequate amount of highly liquid assets in the investment portfolio.

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