LIQUIDITY–HOW A BANK RAISES CASH.

LIQUIDITY—HOW A BANK RAISES CASH. The post-mortems on Lehman Brothers spoke of how some institutions had reserves (liquid assets) which were only about 4% of their total assets, a very low percentage. If there is a warning of a potential run on the bank, the bank should either increase capital (find new investment in the firm) or convert other assets into liquid assets (“assets which can be converted with little expense at short notice into means of payment.”) Lehman Brothers had about six months of warning from when Bear Stearns cratered and about one year from the financial crisis of last year to build up its liquid assets. Although it might not have made any difference, I am astounded that it still owned its own building. To compound its problems, many of the assets that Lehman held were rated triple A. They carried little credit risk; there was a very high probability that they would be repaid if they were held to maturity. But they were extremely complicated and very difficult to sell quickly—the opposite of liquid.

This entry was posted in Economics. Bookmark the permalink.

One Response to LIQUIDITY–HOW A BANK RAISES CASH.

  1. Pingback: THE VIEW FROM AUGUST—ARE CASH RESERVES INEFFICIENT? | Pater Familias

Leave a Reply

Your email address will not be published.