Bank Capital and Liquidity

Bank Capital and Liquidity

Tim explains the difference between Bank Capital and Bank Liquidity - a critical distinction that is all too often misunderstood.
Overview

Bank capital and liquidity perform different functions. Equity capital is provided by shareholders and is the first buffer against losses in a downturn. Equity enables banks to shrink the liabilities side of their balance sheets to match a shrinking asset base caused by losses. Liquidity can be deployed to meet short-term obligations such as large-scale sudden deposit withdrawals. Withdrawals reduce the liabilities side of the balance sheet; the liquidity portfolio can be shrunk to match that change.

Key learning objectives:

  • Explain the difference between capital and liquidity

  • Explain the role of capital in a property downturn

  • Explain how a bank uses it liquidity portfolio to deal with deposit withdrawals

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