Notes On The Financial System

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1- Introduction Over the last decade, the financial system around the world has faced several deficits due to liquidity problems. In 2007, during the financial crisis, global banking system experienced sudden demands for cash from various borrowers which have led some banks to declare bankruptcy (Berrospide, 2013). Liquidity can be defined as the availability of cash or cash equivalent to deal with predicted and unpredicted obligations claims. In other words, it is the ability to effectively meet the demand of liability holders without incurring losses (Banks, 2013). Liquidity risk is a normal issue of the everyday activity of banks because they are required to cash deal with deposit holders every day. As Maria et al (2013) states that liquidity risk that related to the liability side arises from the failure of banks to correctly address and reimburse the unanticipated amount of cash withdrawal and make cash repayments. Such a failure occurs either because banks runs or deposit drain, in which there is a shortage of the amount of cash held by banks. This essay will argue that the two forms of liquidity, namely, bank runs and deposit drain can be reduced by advance liquidity planning. In this essay, the problem of liquidity and its forms will be illustrated, followed by two possible solutions. Finally, the implications and the evaluations of the possible solutions will be presented. 2- The problem of liquidity risk 2.1 Current situation Currently,
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