Liquidity means the capacity to produce cash on demand at a reasonable cost. A bank is considered to be liquid if it has ready access to immediately spendable funds to reasonable cost at precisely the time those funds are needed. No doubt, the most liquid asset is cash in the vaults of a bank. It is necessary for a banker to keep a certain percentage of the deposits in the form of liquid cash as reserve, either in his own vaults with central bank. But such liquid cash does not earn anything and remains idle. So the banker should invest his excess money in some assets which are liquid in a nature and any consider liquidity ahead of profitability if there is any question of choice.
There are three different liquidity theories:
- Self-liquidating or real bills doctrine
- Shift ability theory
- Anticipated income theory
More from this Section
Chartists— financial technical analysts; chartists focus on price and volume data to determine past trends that are expected to continue into the future.
- Foreign Exchange Brokers
Foreign exchange brokers are agents who facilitate trading between dealers without themselves becoming principals in the transaction. For this service, they charge ...
- Online Banking
A whole new concept of online banking has arrived- the performance of banking activities via the Internet. Banks use a variety of...
- Cash conversion cycle
Cash conversion cycle is the period of time extending between cash outflow of purchased inputs and materials and cash inflow from cash settlement ...
- Credit according to duration of period
There are thee types of loans according to duration of period : such as, Short term: These types of loans are provided only for ...
- Advance Payment Guarantee/ Bond
Advance Payment Guarantee/ Bond is a guarantee that advance payments will be returned if the party
- Variable Expenses
Variable Expenses Costs of doing business that vary with the volume of business, such as advertising costs, manufacturing costs and bad debts.