Funding liquidity is the ability bank assumes liability and settles obligations. According to the International Monetary Fund (IMF), funding liquidity is the ability lending agency agrees payment with immediacy.
Contents
Compared to market liquidity
Funding liquidity, market liquidity and the degree of their correlation are significant measurements to evaluate the development of financial market. Both funding liquidity and market liquidity are definitions which reflect movement of market. Good market liquidity means financial assets can become assets realization following market price in time. That leads to a good funding liquidity that investors or speculators raise fund from financial market smoothly.
The difference between funding liquidity and market liquidity is that liquidity is about degree of freedom and economical efficiency for borrowing financial assets but market liquidity is for selling financial assets.
Risk
As the possibility that over a specific horizon the bank will become unable to settle obligations with immediacy, funding liquidity risk is another significant definition to describe economic ability. According to IMF, funding liquidity risk means latent of possible that financial intermediary is unable to repay the liability in expiration of obligation. Funding liquidity risk relies on the four liquidity sources above. The features of funding liquidity risk and market liquidity risk are similar. For most time, Funding liquidity risk is low and stable, and occasionally makes great shock.
Influences of risk and profit
The liquidity and profitability of the funding are changing in opposite direction. If cash is the most liquid assets, but a kind of non-profit assets at the same time, it cannot bring any benefits to enterprise.