Definition

Liquidity Theory

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:

  1. Self-liquidating or real bills doctrine
  2. Shift ability theory
  3. Anticipated income theory
Share it:  Cite

More from this Section

  • Main / Spread
    Main / Spread is the difference between the buying and selling rates of a foreign exchange ...
  • Subpart F.
    Subpart F. is a type of foreign income, as defined in the U.S. tax code, which under certain ...
  • FDIC Improvement Act
    is a law passed by the U.S. Congress in 1991 to recapitalize the Federal Deposit Insurance ...
  • Capital Markets
    Capital Markets are the financial markets in various countries in which various types ...
  • Eurocredit market
    Eurocredit market refers to the collection of banks that accept deposits and provide loans ...