Funding liquidity is the availability of

credit Credit (from Latin verb ''credit'', meaning "one believes") is the trust which allows one party to provide money or resources to another party wherein the second party does not reimburse the first party immediately (thereby generating a debt) ...

to finance the purchase of

financial asset A financial asset is a non-physical asset whose value is derived from a contractual claim, such as deposit (finance), bank deposits, bond (finance), bonds, and participations in companies' share capital. Financial assets are usually more market li ...

s. The

International Monetary Fund The International Monetary Fund (IMF) is a major financial agency of the United Nations, and an international financial institution funded by 191 member countries, with headquarters in Washington, D.C. It is regarded as the global lender of las ...

(IMF) defines funding liquidity as "the ability of a solvent institution to make agreed-upon payments in a timely fashion". Funding liquidity is essentially a binary concept: a bank can either settle obligations or it cannot.

Sources of funding

Liquidity Liquidity is a concept in economics involving the convertibility of assets and obligations. It can include: * Market liquidity In business, economics or investment, market liquidity is a market's feature whereby an individual or firm can quic ...

is the key source of revenue for banks, and can be provided by either depositors or markets. Examples of fund sources include selling of assets and securities,

syndicated loan A syndicated loan is one that is provided by a group of lenders and is structured, arranged, and administered by one or several commercial banks or investment banks known as lead arrangers. The syndicated loan market is the dominant way for l ...

s, secondary market mortgages,

capital market A capital market is a financial market in which long-term debt (over a year) or equity-backed securities are bought and sold, in contrast to a money market where short-term debt is bought and sold. Capital markets channel the wealth of savers ...

s, inter-bank market, and capital by borrowing from a

central bank A central bank, reserve bank, national bank, or monetary authority is an institution that manages the monetary policy of a country or monetary union. In contrast to a commercial bank, a central bank possesses a monopoly on increasing the mo ...

. The degree of correlation between funding liquidity and

market liquidity In business, economics or investment, market liquidity is a market's feature whereby an individual or firm can quickly purchase or sell an asset without causing a drastic change in the asset's price. Liquidity involves the trade-off between the ...

acts as an important parameter for evaluating the development of a

financial market A financial market is a market in which people trade financial securities and derivatives at low transaction costs. Some of the securities include stocks and bonds, raw materials and precious metals, which are known in the financial marke ...

and reflects the activity of the market. Funding liquidity is related to the degree of freedom and

economic efficiency In microeconomics, economic efficiency, depending on the context, is usually one of the following two related concepts: * Allocative or Pareto efficiency: any changes made to assist one person would harm another. * Productive efficiency: no addit ...

in relation to the borrowing of financial assets, whereas market liquidity is related to selling of financial assets.

Funding liquidity risk

The possibility that a bank could become unable to settle obligations with immediacy is called Funding Liquidity Risk. Funding liquidity is essentially a binary concept: a bank can either settle obligations or it cannot. Funding liquidity risk, however, can take infinitely many values because it is related to the distribution of future outcomes. A different time scale is implicit in this distinction. Funding liquidity is associated with one particular point in time. Conversely, funding liquidity risk is always forward-looking and measured over a specific horizon. In this respect, concerns about the future ability to settle obligations, like future funding liquidity, will affect current funding liquidity risk. The distinction between liquidity and liquidity risk is straightforward and analogous to other risks. The liquidity and profitability of the funding vary inversely. If

cash In economics, cash is money in the physical form of currency, such as banknotes and coins. In book-keeping and financial accounting, cash is current assets comprising currency or currency equivalents that can be accessed immediately or near-i ...

is the most liquid asset and a non-profit asset at the same time, it is unlikely to bring benefits to an enterprise.Haan, L. D., & End, J. W. V. D. (2013). Banks’ responses to funding liquidity shocks: lending adjustment, liquidity hoarding, and fire sales. Journal of International Financial Markets Institutions & Money, 26(1), 152-174.

References

{{Financial crises Banking Credit