Solvency and Liquidity in Banking - Similarities and Differences Free Essay Example, 2500 words

Liquidity includes cash, credit, and equity but in most cases, the use of credit is preferred by many organizations such as bank rather than cash. The reason behind this is because many financial institutions that do a lot of investments in many countries do prefer to carry the transaction using borrowed cash. Traditionally, many of the consumers who carried business transactions preferred credit cards rather than cash since they were concerned with interest rates that normally make the business or the firm to be stable in the market though liquidity is measured by the money supply in the country. In the United States, the Federal Reserve manages liquidity with the monetary policy tools, the most important tool that it normally uses is fed funds rate which is normally concerned with short-term interest rates. The use of an open market is another tool that is used. It affects the liquidity of the country, for example, when fed fund rate is low, then the capital is easily available to the banks and other financial institutions. Low rates in the United States are recommended since they reduce the risk of borrowing because the return of the fund must be higher than the interest rate (Bucay and Rosen 15). We will write a custom essay sample on Solvency and Liquidity in Banking - Similarities and Differences or any topic specifically for you Only $17.96 $11.86/page