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Related to Liquidity: Liquidity ratio, Liquidity risk



the mobility of the assets of enterprises, firms, or banks in capitalist countries, ensuring the genuine ability (capability) to pay off within a given period all liabilities and lawful monetary claims.

The degree of liquidity is defined as the ratio between the ready money and quickly salable assets of an enterprise, firm, or bank and the sum of its short-term liabilities. Quickly salable (liquid) assets include government securities, the stocks and bonds of large corporations (which can always be sold on the stock exchange), fixed-term promissory notes of respectable firms (which are accepted without difficulty for discounting and rediscounting by banks), and gold and other precious metals. Also included in calculations of liquidity is assured debtor liability, that is, accounts receivable and the like that can be repayed on first request or within a brief period. Easily salable material-commodity resources are also considered among the liquid assets of industrial and commercial enterprises. The higher the percentage of assets that can be rapidly converted into ready cash, the greater the liquidity of an enterprise, firm, or bank.

The liquidity of commercial banks—the uninterrupted payment of depositor claims—is of particular importance in the capitalist economic system. In order to assure such liquidity, legislation on banking usually establishes the level of cash reserves that commercial banks must maintain in a central bank; the level is determined as a percentage of the total current assets and term deposits and is referred to as a minimum bank reserve.

Business fluctuations and, in particular, economic crises lower the liquidity of enterprises, firms, and banks and lead to many bankruptcies. Under the conditions of the general crisis of capitalism, the liquidity of less powerful banks is declining; they are being absorbed by larger banks, which in turn merge into giant banks.

A specific form of liquidity is international liquidity, defined as the ratio between the gold currency reserves of governments and central banks of the capitalist countries and the sum of their foreign payments that must be guaranteed by these reserves. After World War II this ratio declined, leading to a sharp aggravation of the problem of international liquidity. Circulation related to foreign trade expanded considerably, in terms of physical volume and especially in terms of value. This expansion was a result of general inflation and the rise of prices, combined with an uneven distribution of gold-currency reserves and the relatively stable level of the overall total of these reserves. (This stability is due in part to the depressed price of gold, which was artificially maintained by the USA: prior to December 1971 the price of gold was $35 per troy ounce, after which it rose to $38 and then, in February 1973, to $42.20.)


References in periodicals archive ?
Liquidity is defined in economic literature in many various ways.
Throughout the lending process, the preponderance of financial-sector liabilities created--contemporary money and credit--will be perceived to be of the highest quality and liquidity.
At the same time, the guidance emphasizes that the primary facility is only one of many tools institutions may use in managing their backup liquidity needs, and that institutions should maintain access to a diversified array of funding sources.
The New York Insurance Department launched an effort to solicit information on the liquidity risks of the 140 licensed insurance companies and 65 accredited reinsurers in the state, in light of General American's experience.
Registrants are required to identify and describe internal and external liquidity sources (29) and discuss unused sources of liquid assets (30).
Generally speaking, liquidity is better in large market sectors with higher debt outstanding and higher daily trading volume, such as federal agencies and corporate securities.
On days when the aggegate level of reserves falls short of what depositories anticipated, the federal funds market tightens, and the largest banks can be subject to sudden demands for short-term liquidity.
70 percent of participants indicated that they expect liquidity levels to either increase or stay the same in 2006.