Montes-Negret, Fernando2012-03-192012-03-192009-11-01https://hdl.handle.net/10986/4331Liquidity and solvency have been called the "heavenly twins" of banking (Goodhart, Charles, 'Liquidity Risk Management', Financial Stability Review -- Special Issue on Liquidity, Banque de France, No. 11, February, 2008). Since these "twins" interact in complex ways, it is difficult -- particularly at times of crisis--to distinguish between them, especially in the presence of information asymmetries (Information asymmetry occurs when one party has more or better information than the other, creating an imbalance of power, giving rise to adverse selection and moral hazard ). An insolvent bank can be liquid or illiquid, and a solvent bank may be at times illiquid. In the latter case, insolvency is not far away, since banking is grounded in information and confidence, and it is confidence which in the end determines liquidity. In other words, liquidity is very much endogenous, determined by the general condition of a bank, as well as the perception of it by the public and market participants. Dealing with liquidity risk is more challenging than dealing with other risks, since liquidity is the result of all the operations of a bank and it is fundamentally a relative concept which compares segments of the balance sheet on the asset and liability sides. It does not deal with absolutes, like arguably the concept of capital and it explains why there is not an internationally recognized "Liquidity Accord". This Working Paper addresses key concepts like market and funding liquidity and basic tools to address liquidity issues like cash flows, liquidity gaps and some selected financial ratios. It aims at providing an introductory guide to risk assessment and management, and provides useful and practical guidelines to undertake liquidity assessments which could prove useful in preparing Financial Assessment Programs (FSAPS) in member countries of the Bretton Woods institutions.CC BY 3.0 IGOACCOUNTINGALTERNATIVE INVESTMENTSAMORTIZATIONASSET PRICEASSET PRICESASSET VALUESASSET-LIABILITY MANAGEMENTASSETS RATIOASYMMETRIC INFORMATIONAUCTIONSBAILOUTSBALANCE SHEETBALANCE SHEET RATIOSBANK ASSETSBANK BALANCE SHEETBANK BRANCHESBANK CREDITORSBANK DEPOSITBANK DEPOSITSBANK LIQUIDITYBANK MARKETBANKING INSTITUTIONBANKING INSTITUTIONSBANKING SYSTEMBANKING SYSTEMSBANKRUPTCYBIDBORROWING CAPACITYBROKERSBUSINESS CYCLECAPITAL BASECAPITAL MARKETSCASH FLOWCASH FLOWSCASH INFLOWSCASH OUTFLOWSCDSCENTRAL BANKCENTRAL BANKSCOLLATERALCOLLATERAL RISKSCOLLATERALIZATIONCOLLECTIVE ACTIONCOLLECTIVE ACTION PROBLEMCOMMERCIAL BANKSCOMMERCIAL PAPERCOMMODITY PRICESCOMPETITIVE MARKETSCONTINGENT LIABILITIESCORPORATE BORROWERSCREDIT CARDSCREDIT EXPANSIONCREDIT LINESCREDIT QUALITYCREDIT RISKCREDIT RISKSCREDIT STANDINGCREDITORCREDITORSCRISIS COUNTRIESCURRENCYCURRENCY BOARDCURRENCY BOARDSCURRENCY MISMATCHESDEFAULTSDEFICITSDEGREE OF LIQUIDITYDEPOSITDEPOSIT ACCOUNTSDEPOSIT INSURANCEDEPOSITORSDEPOSITSDERIVATIVESDERIVATIVES MARKETSDOMESTIC BANKINGDOMESTIC BANKSDOMESTIC CURRENCYEQUITIESEQUITY CAPITALEQUITY INDEXESEXCESS LIQUIDITYEXCHANGE RATEEXTERNAL BORROWINGFACE VALUEFAIR PRICESFINANCIAL CRISESFINANCIAL CRISISFINANCIAL INSTITUTIONSFINANCIAL MARKETSFINANCIAL PERFORMANCEFINANCIAL STABILITYFINANCIAL SYSTEMFINANCIAL SYSTEMSFOREIGN BANKSFOREIGN CURRENCIESFOREIGN EXCHANGEFOREIGN EXCHANGE MARKETSFOREIGN EXCHANGE RISKSGOVERNMENT DEBTGOVERNMENT PAPERGOVERNMENT SECURITIESHOLDINGHOLDINGSHOME CURRENCYILLIQUID MARKETSILLIQUIDITYINFORMATION ASYMMETRIESINFORMATION ASYMMETRYINFORMATION SYSTEMSINSIDER TRADINGINSTITUTIONAL FUNDSINSTRUMENTINSURANCE COMPANIESINTEREST RATEINTEREST RATE RISKINTERNATIONAL BANKINTERNATIONAL SETTLEMENTSINVESTINGINVESTMENT ALTERNATIVESINVESTMENT VEHICLESLENDERLENDER OF LAST RESORTLENDER-OF-LAST-RESORTLENDERSLEVEL OF INTEREST RATESLIABILITYLIABILITY MANAGEMENTLIABILITY SIDELIABILITY SIDESLINES OF CREDITLIQUID ASSETSLIQUIDATIONLIQUIDITYLIQUIDITY CRISISLIQUIDITY MANAGEMENTLIQUIDITY POSITIONLIQUIDITY POSITIONSLIQUIDITY PROBLEMLIQUIDITY PROBLEMSLIQUIDITY RATIOLIQUIDITY RATIOSLIQUIDITY RISKLIQUIDITY RISKSLOANLOCAL MARKETLOSS OF CONFIDENCEMACROECONOMIC POLICIESMARK-TO-MARKETMARKET ACCESSMARKET BORROWINGMARKET BORROWINGSMARKET CONDITIONSMARKET CONFIDENCEMARKET DEPTHMARKET DEVELOPMENTSMARKET INTEREST RATESMARKET LIQUIDITYMARKET MAKERMARKET PARTICIPANTSMARKET PLAYERSMARKET PRICESMARKET SHAREMARKET-MAKINGMATURITIESMATURITYMATURITY DATEMATURITY DATESMATURITY MISMATCHMATURITY MISMATCHESMATURITY TRANSFORMATIONMATURITY TRANSFORMATIONSMONETARY POLICYMONEY MARKETMONEY MARKETSMORAL HAZARDMORTGAGESOPEN MARKETPAYMENT SYSTEMSPENSIONPENSION FUNDSPOLICY RESPONSESPOLITICAL ECONOMYPORTFOLIOPORTFOLIOSPREPAYMENTPREPAYMENT OPTIONSPRICE VOLATILITYPRIVATE SECTOR CREDITQUALITY OF ASSETQUALITY OF ASSETSREPAYMENTSRESERVERESERVE REQUIREMENTSRESERVESRETURNRETURN ON ASSETSRETURNSRISK MANAGEMENTRISK MEASUREMENTRISK PROFILERISK SHARINGSAFETY NETSECURITIESSECURITIES MARKETSSETTLEMENTSETTLEMENT SYSTEMSSHAREHOLDERSSHORT-TERM ASSETSSHORT-TERM BORROWINGSHORT-TERM BORROWINGSSMALL BUSINESSESSOLVENCYSUPERVISORY AGENCIESSUPERVISORY AGENCYSWAPT-BILLSTAXTERM DEPOSITSTIME DEPOSITSTRADINGTRANSACTIONTREASURIESTREASURYTREASURY BONDSTREASURY SECURITIESTRUST FUNDSTURNOVERTYPE OF INVESTORSUNDERLYING ASSETSVALUATIONWITHDRAWALWITHDRAWAL OF FUNDSWorld Bank10.1596/1813-9450-5139