It is widespread that banks always had a principal role in all contemporary financial systems Essay Example

It is widespread that banks always had a principal role in all contemporary financial systems. The basic part of them, commonly, is the change of fluid store liabilities into illiquid resources, for example, advances; this makes banks by and large defenseless against liquidity risk.Due to the potential risks in global financial environment, it has to be assured that a financial institution, such as a bank, is able to continue to perform its fundamental role. Liquidity speaks to the limit of a bank to subsidize increments in resources and meet out of this world due, without bringing about unsatisfactory misfortunes. In other words, we could define that liquidity is assuring access to cash when it is needed. Bank’s liquidity is about the confidence of counterparties and depositors in the institution and its perceived solvency or capital adequacy. Since liquidity costs, it should be in balance because banks have to meet all the regulations, therefore it should exist a manager of liquidity risk. This risk tries to secure a bank’s ability to carry out this fundamental role.After the global financial turmoil (2008) many banks had negative effect because they could not follow the agreement to fund liquidity and their ability to do business in financial markets without causing important price impact (market liquidity) led to the condition that weakens liquidity and put in danger the global financial stability. There were two important trends that supported the easily broken funding framework at some banks, before the financial crisis. Firstly, instead of stable retail deposits or longer-term debt, there was a rising dependence on short-term wholesale funding. Secondly, banks collected large amounts of assets that turned out to be less liquid than anticipated especially the securitized debt instruments, such as collateralized debt obligations and residentials mortgage-backed securities. In demanded market conditions, banks could not convert into collateral these assets in nonpublic markets. After the above-mentioned problems, the Basel Committee developed the liquidity coverage ratio (LCR), which is to encourage the endurance of bank liquidity and restrict the need for public aid, and the net stable funding ratio (NSFR), which is created to advertise a more stable funding profile regarding to the maturity profile of assets, decreasing the prior of banks to funding-liquidity risk. The whole this situation central banks are the most reliable provider of liquidity; thus, they are playing a major role in the solvency of banks liquidity.