Showing posts with label Banks are illiquid. Show all posts
Showing posts with label Banks are illiquid. Show all posts

Tuesday, May 31, 2011

Are The Banks Illiquid?



To understand the current financial crisis, it is good to keep in mind the following concepts:
- The real business of a bank is to make the transformation: to transform short-term resources into long-term jobs. By definition, a bank is illiquid. The maturity of its assets is always longer than its liabilities, that resources are deposits of customers or funds borrowed from the market. Transform the asset into a negotiable instrument in any market changes nothing; it merely shifts the problem.
A bank and the banking system generally work only on trust: if the bank cannot find resources on the market, or if depositors fearing for their money, liquidity risk materialize. You can create all the regulations, regulations, national supervisory bodies and international as you want, it makes no difference.
And on this point, the structure of bank capital is of little influence.
On 29 September, Dexia and Natixis lost over 25% in stock. DEXIA is owned by Belgian public authorities and the CDC, NATIXIS is not owned banks, mutual insurance group, and Caisses d'Epargne, in the bosom of the CDC still. These are no short-term shareholders or speculators eager to immediate profits.