Aware of this sudden noise around Liquidity risk?

Liquidity couldn’t have looked and sounded more critical in the past than it does now! For years and decades together companies have, irrespective of which sector they belonged to, merrily ignored the importance of cash and cash convertibility. In today’s crunch times, Banks have no guarantee that the deposits will not betaken back by the depositors.

Now logically answer this! Who doesn’t want to keep cash in hand in these times? Who really would be keen on parting with his preciously earned money and waiting for it to grow into a golden goose? - Practically a very small percentage of the investing class.

And why would you take steps towards it?

Technically, a Bank would face a certain financial risk if it weren’t in a position to liquidate its assets. Considering that many Banks are not going robust with their money expansion and speculation strategies, the presence of fully owned assets is going down drastically. In the pre-financial crisis stage, lending and borrowing was a banking trend of sorts and asset ownerships was at its buoyant best. But with the subsequent crashing of credit lending and leading Corporates, no one is now willing to continue thriving on loaned asset ownership. Makes sense for sure!! Did anyone just hear the following adage playing in the background—"Whilst you start hearing subtle winds, It’s time to start saving for the rainy day."

Hence came a mandatory Central Bank action in the form of the Basel Committee that spoke of supervisory rules and minimum limits of reserves in order to maintain stability.

The idea of this committee was to not slap forced legislatives on each Banking participant but to help them chalk out a contingency funding plan that is operational at every stages of an economic cycle.

Why just during an economic slowdown?

The point is we don’t need robust solutions only at the time of an imminent and pounding crises, we need such plans also when the economy picks up again. This is because of two primary reasons:

1.A lack of discipline at any revival stage, can lead to the formation of a new credit bubble

2.Uncontrolled money supply and availability of cash can lead to economic events like Stagflation and Deflation, thereby harming macro economic interest of a country.

So all in all, this whole liquidity crisis talk can be met with effectively if we go with strategic tools like relevant stress test scenarios and understand that applying minimum limits to preserved cash in all market participants will not lead to false deceptions culminating out of Credit. In the lack of such temptations, spot market will flourish and not lead to misappropriated balances and transactions.

And you know what this will lead to? You won’t get to hear things like-"Oh!! That sector is very dicey right now!!" and "This sector can crumble any time."

That’s the magic potion behind a stable economy!!