Liquidity And Liquidity Risk Management Essay - 1170 Words

Liquidity and Liquidity Risk Assets come in many forms, differentiating in their liquidity. Liquidity, by definition, is how easy an asset can be traded (Hertrich, 2015). Different assets have different abilities to be traded, cash being the easiest; hence cash is the most liquid asset. This causes price differentiation, where more liquid assets have higher price tags and lower trading costs (Hertrich, 2015). This makes more liquid assets more attractive for investors. When assets have low liquidity there are risks involved for investors because there is a chance that the asset cannot be turned into cash when needed. Liquidity risk calculates the difficulty of selling an asset in return for cash (Currie, 2011). Liquidity risk is associated with low liquidity; hence there is a negative relationship between liquidity and liquidity risk (Hertrich, 2015). This implies that the higher the liquidity risk of the asset, the less the possibility the asset can be traded. Typically, financial markets in developed countries are liquid; however, in the US during the Global Financial Crisis [GFC], many homeowners were unable to sell their houses due to declining prices and falling demand, so the housing market became illiquid (Currie, 2011). The GFC demonstrated how volatile liquidity can be and that â€Å"liquidity disruption could be system-wide,† seen by its global effect (Bessis, 2015). During the GFC, there was also a systemic bank crisis. At a bank’s perspective, liquidity is theShow MoreRelatedLiquidity Risk, Distinctions Between Asset Liquidity And Liability Liquidity Management Essay1838 Words   |  8 Pagesinvestigate liquidity risk, distinctions between asset liquidity and liability liquidity management, as well as the main features of an effective liquidity management. In order to gain insight of liquidity, there is a graph based on the liquidity ratio to analyze the liquidity risk of four major banks in Australia and the adva ntages and disadvantages of the liquidity ratio. Furthermore, it outlines how Basel III effects the banking liquidity management. Introduction In recent years, liquidity risk has becomeRead MoreDifferences Between Lcr And Aps 2101609 Words   |  7 Pagesand APS 210 â€Å"The new Basel III framework establishes higher liquidity requirements to ensure banks are better-equipped to absorb losses like those relating to the global financial crisis†. (Delimatsis Panagiotis, 2012) Basel III promotes LCR (liquidity coverage ratio), ratio of high quality liquid assets(HQLA) to total net liquidity outflows over 30 days. Theoretically, banks whose LCR is more than 100 percent possess sufficient liquidity to withstand a month of elevated financial stress. 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The risks they face include credit risk, market risk, business risk and interest rate risk to name a few. And bank capital plays an essential role in the absorption of losses related to these risks. Credit Risk Credit risk is the risk that an obligator will