Liquidity
Definition:
The ability of a settlement system participant to meet its current obligations in respect of funds and/or securities transfer.
The liquidity of a Participant in the settlement system is measured by four components:
- Available balance (funds) on the current account
- Queued payment transfers from other participants in the settlement system to its account
- Credits extended by the central bank
- Funds from interbank money market transactions.
- Funds blocked at the central bank in a statutory minimum reserve account
Details:
Liquidity is a very important factor that concerns the treasury department of any bank or financial institution that is a member of a payment system. Liquidity issues can lead to dangerous problems for a participant, that is why there are lot of regulations and requirements from central financial institutions regarding this subject. That is why in many countries the participants in a settlement system sometimes are required to block funds in a so called “statutory minimum reserve account” just to make sure that they do not run in liquidity problems.
Note:
This is a series of posts with definitions for the jargon used in #banking, #fintech and #payments.
Too many people use some terms without understanding them beyond the definition.
Too many “experts” use the terms but they never had experience with the actual implementation of anything in #banking, #fintech and #payments.