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Distinction between Liquidity and Solvency in Banking - Coursework Example

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The paper “Distinction between Liquidity and Solvency in Banking” marks that liquidity is estimated as a bank or human's ability to convert assets to achieve current financial obligation, while solvency suggests the scale to which current assets will exceed the current assets liabilities.
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Distinction between Liquidity and Solvency in Banking
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Download file to see previous pages Solvency in banking entails the degree to which the current assets of an individual or a bank or any other business exceeds the current assets liabilities. The purpose of solvency is to meet long-term fixed expenses with an aim of long-term expansion and growth.  Solvency is a policy issue for all financial institutions on what they decide on the average capital charges that are set.  It can also be termed as survival means of the banks and this policy is the current and possible future G10 bank regulation. To experience economic solvency, then banks must make sure that capital setting decisions are made. Investors normally wait for the banks to be insolvency state where they will venture in the market so that profit may be experienced thus greater tolerance for the credit defaults.
One of the advantages of liquidity in banking is that deposit inflows provide loan demands thus a decline in the market liquidity is experienced. Through the use of insurance coverage, the firm is insured against a systematic decline in the market liquidity at lower cost making the institution to be more aggressive in the market. The monetary policy tools used are advantages to the economy since liquidity creates economic growth.  The main disadvantage of liquidity is when a country experience liquidity glut it will mean that inflation is going to be experienced making it hard for the country to be stable thus making it difficult to achieve the objectives set by the country in terms of growth rate. Solvency in banking, on the other hand, is advantageous in that through the use of reserves and equity the growth and stability of a nation is attained. Financial crisis will be eliminated in the economy making sure that the investors enjoy the market throughout the period of solvency (Gaist 11). Inflation is controllable due to the use of reserves. The disadvantage is that during the period where a regulatory board is controlling capital in the economy investors will have to experience a shortage of fund and it can even go to an extent of losses to be incurred. For any financial institution to operate efficiently, then enough liquid assets must be available so that current obligations can be met. Liquidity in other term can be defined as the ability of current assets to meet current liabilities thus making the organization to meet the objective set. ...Download file to see next pagesRead More
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