How Do Banks Increase Their Liquidity?

How Do Banks Increase Their Liquidity? This essay will be looking into liquidity problems within individual banks, exploring why it is absolutely essential for banks to have good liquidity and exploring the sources of liquidity that are available to them, should they need to increase it. Over the past year there have been an assortment of serious issues involving banks, with the nationalisation and part-nationalisation of several retail banks in the UK, including Royal Bank of Scotland, Bradford Bingley, HBOS and Northern Rock and the collapse of various large financial institutions in the US and Europe including Bear Sterns and Lehman Brothers. It will also look into why these banks faced such problems, and examine the role that the Central Bank plays in managing liquidity within the money markets, and how it can help individual banks and the entire banking system if liquidity becomes an issue. Explain why banks have become under-capitalised and insufficiently liquid and that there are ways for banks to sort out their liquidity. Firstly it is necessary to define liquidity, and explain the reason that liquidity is so important for banks. Liquidity is essentially immediately spendable funds or the ability to convert assets into spendable funds, quickly and easily without a significant loss. Banks need liquidity because of demands for spendable funds. These demands mainly come from customers wishing to withdraw money from their accounts and from customers with credit requests, either in the form of new loans or drawings upon existing credit lines. However banks will also have a demand for liquidity for other reasons including paying off liabilities that they have for example loans from other banks, or the central bank, payment of income taxes and the paying of cash dividends to their shareholders. Sources of liquidity that banks have available to them fall into two categories; asset liquidity and borrowed liquidity, with most banks tending to use a mix between them both known as balanced liquidity management. Banks using a balanced liquidity management strategy look at their expected liquidity demands, store some of these demands in liquid assets and the rest left down to prearranged lines of credit from potential suppliers of funds. The stock of liquid assets is held by banks solely as a reserve, which can be turned into cash in crisis conditions, when a bank cannot meet its financial obligation. These assets must be of high quality so that in times of need, they can be sold immediately with minimal losses. These liquid assets, other than cash, include: Commercial paper is issued by large corporations as a form of short term borrowing. The maturity of commercial paper is in most cases between 7 and 45 days, and is sold similarly to the treasury bills, at a discount to its maturity value. Commercial paper is generally unsecured, making it riskier than buying treasury bills. Companies using commercial paper will normally get a credit rating check from a credit rating agency and the better the rating they achieve, the smaller the discount they can issue it at, as it is a more secure investment. A certificate of deposit (CD) is a certificate stating that a deposit has been made with a bank for a fixed period of time, and that at the end of the fixed term, the original deposit will be repaid with interest. The advantage of CDs for the depositor is that they are tradable to third parties, so the depositor can make use of the funds, if needs be, before the maturity date. The advantage to the financial institution issuing the CD is that they can make use of the deposit for the fixed period, but because they offer the depositor flexibility, the bank gets it for a slightly lower price than they would normally have to pay for other time deposits such as repos. The disadvantage of the CD is that the depositor has to deposit a minimum denomination of  £50,000 which means that small companies may not have the money for them. Repurchase agreements (Repos) are a combination of two transactions, and play a critical role in the money markets. It works by firstly a securities dealer, such as a banks, sells securities it owns to an investor and agrees to repurchase them at a specified higher price at a date in the future. This is a great way for dealers to raise funds quickly. For the investor, repos can be a very profitable short term investment. This is because not only will they make money with the dealer buying the securities back at a higher price, but if they believe that the price of the securities will drop, then they can sell them, and then potentially purchase equivalent securities to return to the dealer just before the repo must be unwound. Therefore the investor has potentially made more money on top of the interest earned from the dealer. Treasury Bills are securities with a maturity of one year or less, and are issued by national governments. These are generally considered to be the safest of all investments, and for this reason they account for a larger share of money market trading than any other type of instrument. They are also known as zero coupon bonds, as they do not pay any interest, but instead are bought at a discount rate to their face value, depending on how long it is until the security matures. The main sources of borrowed liquidity available to banks inlcude: The Interbank lending market is a market where banks can lend money to each other. This provides banks with the ability to get funds quickly in times of bad liquidity and also provides an outlet for lending excess funds. The loans are normally short term loans, generally between 1 and 14 days, but can be longer. The interbank lending market has its own interest rate, called the London Interbank Offered Rate (LIBOR), which is currently stabilised at just over 0.6%, around 10 basis points above the current base rate. Euromarkets have been some of the fastest growing markets in recent years and are basically any instrument denominated in a currency other than that of the country where it is traded. Financial institutions will look for money at the lowest price, regardless of the currency, and then change it into the home currency. This can be a good way of finding cheap money quickly, especially if the interbank lending market has dried up as it has done recently. Bond Markets are a great way of getting liquidity as there is a huge market for bonds. Bonds offer the investor interest throughout the life of the bond, and repayment of the original principle at the end. Unlike shares, the owner of the bond does not have any degree of managerial control or ownership of the issuer. For this reason it is a great way to get liquidity, because the issuer is not losing any of the company or institution and therefore none of its powers. The interest rates however must be competitive on the day of issue, but need to be just right as if it is too high, then the issuer could end up with excessive costs, but if it is too low, then they may not be able to sell them. Explain what role the bank of England has, and how it operates in the money markets and how banks are affected by the operations of the bank of England (interest rates etc) The Bank of Englands principal function is to conduct money and credit policy to promote sustainable growth in the economy and avoid severe inflation. There are various tools it uses in its role of helping in maintaining stability in the financial system as a whole, finding potential problems and risks and trying to find ways of fixing these problems and reducing the risks. In trying to achieve its main goals, the Bank of England effects the operations of all the banks, and they must be prepared for all outcomes. The tools that the central bank uses are outlined below. The Bank of England is responsible for the Governments accounts, and provides them with regular statements and banking services. It is also the banker of all commercial banks, and all commercial banks are required by law to keep 0.15% of the liabilities in their account with the central bank. The central bank is the Issuer of bank notes in England and Wales, but not the rest of the UK. It controls the countries reserves of gold and foreign currencies for the government, and by buying and selling these the central bank can influence the exchange rate. The central bank is known as the lender of last resort, and will always lend to the banks if there is a shortage of liquidity in the banking system. This has been shown vastly over the last couple of years, and has been fundamental in stopping the banking system from the possibility of total collapse. One example of this was the Northern Rock PLC in 2007, where a rumour that the bank was in serious financial trouble led to people with deposits in the bank lining up outside the banks demanding their deposits. In this instance the Bank of England quickly helped the bank out as lender of last resort. The Bank of England supervises the banking system. There are two main reasons the bank needs to do this which are the fact that customers of the banks and institutions are at a disadvantage because they are not necessarily well informed about the affairs of the intermediary and therefore could be depositing their money into a bank that is on the brink of a collapse. The central bank looks at all of the accounts of the banks to make sure that they are not in a bad position. This leads on to the second reason which is that the consequences of bank failure can be catastrophic to the whole financial system, as we have seen over the past two years, which shows that the central bank should have perhaps been supervising the financial institutions more closely. The Bank of England is involved in advising on the monetary policy. Monetary policy involves controlling the price and quantity of money and credit in the economy, with the use of different policy instruments, which are interest rates and the availability of reserves. Changing interest rates effectively changes the demand for money. The main instrument used today is interest rates. By putting interest rates up, there will be less demand for money, as it costs more to borrow, and on the other hand by lowering interest rates, it will increase the demand for money as it is cheaper. By doing this the Bank of England can basically slow down or speed up the economy and rates of inflation. This has a huge effect on banks, because everything they do relies on interest rates. Look at recent events in the money markets and the responses from firms and government and analyse the impact of these event on both individual firms and financial markets as a whole. Since the financial crisis started with the collapse of the sub-prime mortgages, banks have faced liquidity problems. This is mainly due to the fact that there has been impaired liquidity in a lot of markets, the two main markets being the interbank markets and the securities markets. Banks became unsure of both their own liquidity and the liquidity of other financial institutions, and for that reason they did not want to lend to each other on the interbank markets. This therefore pushed interest rates up in both markets, and with banks becoming increasingly dependent on these markets, it did not look good for liquidity. Many other markets also relied on the banks using these markets, and problems spread into many different markets. This all ended up with banks entailing higher borrowing costs, which then had to be passed in their lending rates and also left the banks with much weaker results. This all lead to some banks defaulting on their payment obligations, as they just did not have the liquidity they needed. Many large institutions around the world had to be bailed out by central banks, with banks in the UK including Northern Rock, Alliance and Leicester, HBOS and Bradford and Bingley amongst several others. The above table outlines the measures that the Central banks around the world took to try to address the situation. The Bank of England used several of these methods to try to resolve the severe liquidity problems that the banks and markets that were facing. As shown in the Essay, it is essential for financial institutions to have good liquidity. It is not important just for the survival of an individual bank, but for the survival of the financial system as a whole. It is clear that in recent events, the banks did not have sufficient liquidity to cover the demands for spendable funds, and in the future they need to have a much higher stock of liquid assets, and not rely so much on borrowed liquidity. It is also clear that big mistakes were made by many financial institutions, and learning from these mistakes is essential in trying to rebuild trust in both the money markets and banks in general. I believe that the Bank of England needs to improve the way it is supervising the banking system, as the collapse of the money markets could potentially have been avoided if certain banks had been supervised more effectively. The financial systems also desperately need to be regulated globally, which was one of the main topics of the G20 summit in 2009. Gordon Brown said We have a global financial system, but until now no global co-ordination or supervision, only national supervisors and a new financial regulatory is due to be released later this year, which will fundamentally change how world banks and markets operate. I believe that this new global financial regulatory system will change the way banks operate for the good, and should stop anything like this happening again. The Things They Carried | Analysis The Things They Carried | Analysis Tim Obriens The Things They Carried is a perfect example of American Contemporary, also known as postmodern, literature, mainly supporting the characteristics of metafiction, and mixture of fiction and facts, all of which are commonly used throughout all forms of postmodern literature. Because this era is current, how it will have on impact on literature still remains to be seen, but what is clear is how the contemporary era has opened a new door to literature allowing people to view the world in a whole different manner also allowing authors to be freer in expressing ideas in their literature. Contemporary literature refers to literature written from 1945 to present. It is often referred to as the era directly after World War II. This era shares many of the characteristics introduced in the modern era, but is unique in the sense that the openness found in this literature is greater. Contemporary literature also has the tendency to contradict modernist thought and brings things into new light. It deals with events and issues within this time frame and for that reason we are able to comprehend a greater deal than before. It allows the reader to feel connected to the novel in a way that wasnt possible before. What both modernism and contemporary literature share is subjectivism. Modernist literature however saw fragmentation and extreme subjectivity as an existential crisis. In contemporary literature this crisis is avoided. It is more common to find self-consciously deconstructed and self-reflexive narrators unlike in modern literature it was all about the anti-heroes and to rtured souls. There is great inner narrative of the self in contemporary. This includes the self at war with itself, to the self as arbiter points back to the phenomenological roots of post-modern thought. As far as linguistic and stylistic characteristics go, contemporary literature has an open form of writing, allowing a writer to be freer with their thoughts and ideas. It is also common to find discontinuous narrative in these works. Intersexuality or borrowing and transformation of certain ideas form other texts is also quiet present in contemporary literature, often borrowing from past modern thought as well. There is an extensive use of classical allusions within the style. What is very interesting about contemporary is its tendency not only to borrow ideas, but the sharing of these ideas and themes that is found in other languages and cultures showing how wide of a spectrum contemporary literature is willing to go. These themes and ideas are often compared and combined. But with all its uniqueness, the thing that makes contemporary stand out from the rest is its unusual usage of metaphors in its literature. This has added richness to this type of literature that many will apprec iate. Contemporary literatures themes also set this era greatly apart from the rest. It has the tendency to shatter existing social customs and faiths, and focus more on depicting vividly the stark and bitter realities. This era of literature is heavily influenced by the severity of the scientific and technological changes of the 20th century. The famous authors and works of thisperiod are vast. Each author has their unique style and way of writing, but each share the same type of freedom found in contemporary literature. No point of view or way of thinking is excluded, but rather embraced and exposed to give insight into completely different worlds that we as people may not be to familiar with, but nevertheless are able to understand on some level. J.D Salinger, famous for the novel The Catcher in The Rye, proves this by giving us a glimpse into the mind of a young adolescent boy Holden who seems to be lost in his own mind. This novel greatly supports the man vs himself theme commonly found throughout contemporary literature. The Things They Carried by Tim OBrien truly expresses exactly what contemporary literature is. Tim OBrien skillfully places all his ideas and own experiences into this collection of stories that make this an excellent piece of contemporary literature. He does everything to make these stories feel as real as possible. Tim OBrien, which also happens to be the main characters name, does this by mixing reality with fiction, a technique commonly found throughout contemporary literature. From his own experiences of the Vietnam War he is able to capture the ugly truths and the harsh, raw, human emotions that real human beings feel. He expresses the dilemma people go through in making rash decisions, and the guilt and pain found in people who went to Vietnam, so accurately it causes one to almost feel these emotions themselves and allows the reader to connect on a level never really possible before the postmodern era. OBrien does an excellent job in making the novel feel as real as possible, which is not quite a necessary characteristic of contemporary literature, but is commonly used and effectively causes a richer literary experience. He said once A thing may happen and be a total lie; another thing may not happen and be truer than the truth. He expresses this view through all the work he does. Although he did experience many of the things he speaks of on some level, he never lets his stories become more than fiction. It is the fiction that represents and reflects our world that makes the real impact on people. Literature is just another form of art. Art serves to represent parts of reality and allow us to see reality in ways we didnt before. The same applies to contemporary literature and the way Tim OBrien tries to capture his audience. His purpose is not to just tell his stories of the war, but to tell these stories in a way that will allow us to reflect and connect on our own lives. He said Its partly a story about what happens to men in a war, but more deeply it touches people to actually look at their own lives and childhoods. The reason that book ends not in the war, but with little Linda dying of brain cancer, is that that chapter is meant to move away from war to the lives of all of us. In doing this the war and its horrors serve as more than just stories of hardships and pain, but as well as a tool that allows these stories to truly serve a purpose. It is still unclear what time of impact our era will make on history, but it is clear however that contemporary literature is greatly rich, unique, and has a tremendous amount of potential to be a impacting literary period that people will continue to study even as time goes by. Postmodernism was the mark of a new age were true free expression was possible and as we moved into the 21st century it has continued to evolve into literature that is free of outside restrictions dropping the boundaries for authors allowing them to right about what they have on their mind or real issues and situations in our past and current world. This is the main reason why contemporary literature focuses so strongly on fiction. Simply because fiction is fiction it leaves a door open to infinite possibilities, and almost unimaginable stories that can move or reflect society and cause one to view the world not from the small aspect that it was shown in earlier eras, but rather from all angles and perspectiv es. Contemporary literature truly allows people to experience the full rich literary experience getting rid of the mind caging structure authors stuck to for so many years.