Financial Markets and Risk - Research Paper Example

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Financial Markets and Risk

Capital liquidity is the cash being maintained by the other financial institutions and the banks and the balances with the central bank. Generally, the banks with a lot of liquid assets are in a lot safer position regarding a meeting of any unexpected withdrawals. There are liquidity management measures, which manage liquidity positions that ensure the funding requirements. It also helps in meeting payment obligations under normal or stressful situations. In simpler words, liquidity for the bank means the ability to meet its financial obligations as they arrive in the due course of time. They lend financial investments in relatively non-liquid assets. So, one of the challenges to a bank is to ensure its liquidity in any condition. Different Commercial banks manage their liquidity in different ways. Customer deposits are the main source of fund for small banks. Its assets mostly comprise of loans to the small firms and individuals. Small banks generally have more deposits in respect to borrowers with strong credit position. These excess funds are turned into assets with high liquidity. This type of banking operation is known as asset management banking. In contrast, large banks lack reserves to sponsor their major business. When needed, they borrow funds from the major lenders as short-term liabilities. This type of banking is termed as liability management, which is riskier than asset management banking. In this way, the banks maintain the liquidity for daily operations and cash outflows. ...Show more

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This paper "Financial Markets and Risk" explores the phenomenon of financial risk. It is stated that financial risks are inevitable while performing banking activities, hence, liquidity and capital needed to be well maintained by the banks and the other financial institutions…
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