The liquidity of a bank is a very important indicator of its activity, therefore it is very important to be able to understand and define it. When choosing a bank for yourself, be sure to take this indicator into account.
First, you need to define the very concept of liquidity. In the broadest sense of the word, banks' liquidity is understood as the ability to timely fulfill all their financial obligations without losses to counterparties within a specified time interval. This is determined by the bank's own capital, its assets and liabilities. It is customary to distinguish 2 main functions of liquidity: meeting the demand for loans and the possibility of early withdrawal of deposits.
Today there are 2 approaches to determining liquidity: as a stock and as a flow.
Liquidity "as stock"
This concept is to determine the level of ability of commercial banks to fulfill obligations to potential customers at a certain point in time. To do this, the structure of assets is changed in favor of highly liquid items at the expense of funds available on unused reserves. To determine the liquidity of stocks, it is enough to compare them with current needs. The disadvantage of this method is that there is no accounting for future, as well as current receipts of liquid assets. These assets are formed from income from operating activities, as well as additional borrowed funds.
Since liquidity "as a reserve" does not fully disclose the essence of the definition, due to the narrow focus on the data of bank balance sheets, there is a second method.
Liquidity "like a stream"
This method is considered from the point of view of dynamics, which means that it allows you to consider a wider range of time. Using this method, it becomes possible to prevent the deterioration of the liquidity level and adjust the existing unfavorable level. This becomes possible thanks to the effective management of liabilities and assets, as well as the attraction of additional borrowed funds, increasing the financial stability of the bank due to the growth of income. There is also a broader approach to looking at liquidity as a flow. It allows the bank to account for and ensure a constant flow of capital, maintaining an additional base of information.
conclusions
Based on the above, we can conclude that each commercial bank is obliged to independently maintain its liquidity at the proper level. At the same time, he should be based on an analysis of his condition for a specific period of time, as well as predict the results of activities and the further implementation of a scientifically based policy in the field of authorized capital. To obtain a more accurate result, it is advisable to take into account reserves and special purpose funds, while not forgetting about attracting borrowed funds and credit operations.
