Measuring Liquidity

 

Measuring Liquidity- Liquidity refers to the ease with which an asset, or security, can be converted into ready cash without affecting its market price. Liquidity is a bank’s capacity to fund an increase in assets and meet both expected and unexpected cash and collateral obligations at a reasonable cost and without incurring unacceptable losses. Liquidity risk is the inability of a bank to meet such obligations as they become due, without adversely affecting the bank’s financial condition. Effective liquidity risk management helps ensure a bank’s ability to meet its obligations as they fall due and reduces the probability of an adverse situation developing. This assumes significance on account of the fact that liquidity crisis, even at a single institution, can have systemic implications. 

Market liquidity refers to the extent to which a market, such as a country’s stock market or a city’s real estate market, allows assets to be bought and sold at stable, transparent prices. In the example above, the market for refrigerators in exchange for rare books is so illiquid that, for all intents and purposes, it does not exist.

Types of Liquid Assets

Liquid assets are such assets held by businesses or individuals, which can be converted into cash quickly. It can include cash, marketable securities as well as money market instruments. All such assets are reflected in the balance sheet of the company.

• Cash
• Cash equivalents 
• Accrued income 
• Stocks