Question

Based on your knowledge of the banking activities, when the financial market is short of liquidity during the financial crisis, please provide suggestions to the financial authorities for solving the problems.

Answer 1

during a financial crisis the investor generally withdrew all there investment from the security market and invest them in some kind of safer investment like Treasuries bills , bonds and bank deposits.financial institutions can play a very important and dominant role.

central bank's monetary policies and governments fiscal policy can help to stimulate the market conditons.various suggestions can be provided in the situations

1) SALE OF GOVERNMENT BOND/ OPEN MARKET OPERATION- central bank can sell the securities as a safe manner of investment and then can accumulate the cash and then can circulate the cash to the productive unit of the society.

2)INCREASING THE RATE OF RETURN ON DEPOSITS- when banks would provide higher rate of interest on deposits then people would tend to deposit there money in the banks and as a result of this the liquidity can be made.

3)IMPROVEMENT AND AMENDMENT IN THE LAWS- bank can ensure a certain level of sum to be insured against the bankruptcy of the financial institution. Recently government of India has insured all the depositor with a sum of rs - 5lac . this will provide confidence in the depositors and liquidity can be insured.

4) THROUGH FOREIGN DEBT- Foreign help concerning with the financial need can boost up the requirement of liquidity crisis. this is a very important and one of the ultimate tool/

5)EXPANSIONARY POLICY- expansionary policy of the central bank is considered to be the last resort to deal with the problem of liquidity and financial crisis because it would lead to enhance the level of inflation.