Bank and Financial Liquidity

Bank Liquidity measured by Bank of England
Bank Liquidity measured by Bank of England

This shows the ratio of liquid assets relative to total assets. It shows that in 2008, banks had a very low % of liquid assets to total assets.

A liquid asset is something that can easily be converted into cash. An illiquid asset is something like a house, it is worth money, but takes time to be sold and converted into cash. The low liquidity is one reason why banks struggled when short term money markets froze. – Banks had come to rely on being able to borrow on money markets. Since the crisis, banks are increasing their ratio of liquid assets.

Financial Market Liquidity
Financial Market Liquidity

This is a study by the Bank of England into the liquidity of the banking sector. Until mid 2007, the banking sector displayed high levels of liquidity i.e. it was relatively easy for banks to borrow on short term money markets. But, when money markets froze, liquidity plummeted. It became very difficult and expensive for banks to borrow. This is why Northern Rock required bailing out by the government. In recent months, there has been some improvement, but, it is still a long way off pre 2007 levels.

more details at Bank of England – financial stability report

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