Financial markets/Financial institutions : Banking Liquid Assets

Overview

• Liquid assets include cash and other assets than can quickly and easily be converted into cash without significant loss of operating capital. Banks maintain liquid assets in order to manage revenue and expenditures in a way that is consistent with the needs of various business units at any particular time.

• There are various ways of measuring, or defining, liquid assets, depending on the purpose of the information. Definitions include the loan to deposit ratio and cash and other assets that can quickly be converted to cash, such as short-term money market investments, securities and stocks. The Bank of Thailand (BOT) reports bank excess liquid assets fortnightly, computed as the sum of cash on hand, BOT deposits and eligible securities, less the required value of assets that must be maintained; the required value is not less than six percent of total deposits of every type plus funds borrowed from abroad for a term of not more than one year.

• Excessively high liquidity suggests that a bank is failing to maximize earnings from its central business of lending. On the other hand, excessively low liquidity suggests that the bank may be unable to meet its commitments in a timely manner. Banks must therefore carefully manage their liquid assets.