Question

What is meant by banking liquidity and Bank solvenc?

what is meant by bank liquidity qnd bqnk solvency?

Answer 1

1. Bank Liquidity:

Liquidity in banking refers to the ability of a bank to meet its financial obligations as they come due. It can come from direct cash holdings in currency or on account at the Federal Reserve or other central bank. More frequently, it comes from acquiring securities that can be sold quickly with minimal loss. This basically states highly creditworthy securities, comprising of government bills, which have short term maturities.

If their maturity is short enough the bank may simply wait for them to return the principle at maturity. For short term, very safe securities favor to trade in liquid markets, stating that large volumes can be sold without moving prices too much and with low transaction costs.

2. Bank Solvency:

Solvency in terms of banks is the ability of a bank to meet its long-term debts and financial obligations and pay off deposits by general public. Solvency is essential to staying in business as it demonstrates a bank’s ability to continue operations into the foreseeable future. While a bank also needs liquidity to thrive and pay off its short-term obligations, such short-term liquidity should not be confused with solvency. A bank that is insolvent will often enter bankruptcy.

Solvency directly relates to the ability of a bank to pay their long-term debts including any associated interest. To be considered solvent, the value of a bank’s assets, must be greater than the sum of its debt obligations. Various mathematical calculations can be performed to help determine the solvency of a business or individual.