It is widespread that banks always had a principal role in all contemporary financial systems
It is widespread that banks always had a principal role in all contemporary financial systems. The fundamental role of them, typically, is the transformation of liquid deposit liabilities into illiquid assets such as loans; this makes banks generally vulnerable to 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 represents the capacity of a bank to fund increases in assets and meet obligations as they come due, without incurring unacceptable losses (Basel Committee, 2008a). 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 a serious problem with their liquidity. The shareholders did not have confidence in their banks and as a result many of them withdraw their funds. All of this has a serious impact on the market conditions because depicts rapidly liquidity can vanish, and that problem of cash flow can last a significant period of time (Basel Committee, 2008b). Liquidity is about having access to cash when you need it. This phenomenon can be caused when there is extreme demand for loans as a result, to banks do not have the ability to pay their liabilities (e.g. loans from other banks). Central banks play a major role in the solvency of banks liquidity.