End of Cousre assignment Example | Topics and Well Written Essays - 2500 words

End of Cousre - Assignment Example If the bank assets take a long time to sell or cannot be converted to cash with ease such as fixed assets they are considered to be illiquid. According to Melicher & Norton (2011), there are various factors that contribute to the liquidity of banks. Banks with a strong capital base can be able to effectively absorb risks associated with assets and ensure safety of depositors funds as well as maintain creditor confidence hence if a bank has a high amount of Tier 1 capital, it has a higher liquidity. Adequate liquidity also involves having a strong bank positive image. If depositors or creditors view the company negatively or suspect it does not have a sound liquidity, they will shun away from the bank and the effect is felt systematically throughout the financial market. The senior managers thus must devise efficient ways of managing liquidity risks so as to gain confidence from creditors and depositors. This can be achieved through offering quality customer services and being transpa rent in its activities by publishing reports. Positive bank image thus contributes to liquidity and vice versa as adequate liquidity ensures banks positive image (Melicher & Norton, 2011). According to Financial Services Authority (2008), asymmetric information can lead to speculation or uncertainty in the financial market regarding the banks creditworthiness and its true worth hence lead to loss in confidence by other banks who can lend it money to settle its debts and maintain liquidity and other creditors and depositors hence transparency is essential. Adequate liquidity also ensures the banks have reduced risk of asset sales at fire-sale prices (FSA, 2007). If a commercial bank wants to meet its obligations and has no assets that can be changed into cash in short time, it may result to selling its illiquid assets which are of high worth at low price leading to an imbalanced balance sheet or solvency. This has the effect of destabilizing the asset market hence influencing asset p rices thus the effect is felt in the whole market. Managing liquidity risks and having adequate liquidity prevents this from happening as a bank can take its time to convert the asset to cash without any loss. Maintaining adequate liquidity also ensures the bank does not hold a high stock of liquid assets as this increases its costs of mitigating risks. This may affect the banks competitiveness especially if other banks do not mitigate risk by maintaining high liquid assets hence run at low costs thus attracting depositors. Greuning & Bratanovic (2009:191) observe that adequate liquidity enables banks to â€Å"compensate for expected and unexpected balance sheet fluctuations and provide funds for growth†. It is also essential to have adequate liquidity as all financial transactions involve elements of liquidity. Liquidity problems have an effect on the whole financial system hence having adequate liquidity is important in maintaining the safety and solvency of commercial bank s. Capital Adequacy The availability of capital as well as its costs is essential in determining the soundness and safety of commercial banks (Greuning & Bratanovic, 2009). Capital adequacy standard is stipulated by Basel I and Basel II capital accords whereby commercial banks are supposed to ensure adequate amount of capital and reserves is maintained in order to guard the bank against solvency. According to Farid & Salahuddin (2006-2010), all countries are supposed to maintain a minimum regulatory