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LIQUIDITY AND BANKING LIQUIDITY: THEORETICAL OVERVIEW

Lahsen Oubdi, Anas Alaoui Mdaghri

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Abstract

The recent financial crisis of 2007-2008 highlighted the important role of liquidity in the banking system. Financial markets around the world have run out of liquidity and many financial institutions have gone bankrupt due to liquidity problems. Nevertheless, liquidity remains a very complex concept to define because of its polymorphic character. Only recently has the literature focused on defining the notion of liquidity and its different forms and the interactions that may exist between them. This paper aims to present a synthesis of reflections on banking liquidity. First, it discusses the different theoretical approaches to the concept and typology of the liquidity concept. Then, it presents the different liquidity risks. Finally, it discusses the main theoretical underpinnings of interactions between types of liquidity.

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What this paper is about

The recent financial crisis of 2007-2008 highlighted the important role of liquidity in the banking system. Financial markets around the world have run out of liquidity and many financial institutions have gone bankrupt due to liquidity problems. Nevertheless, liquidity remains a very complex concept to define because of its polymorphic character. Only recently has the literature focused on defining the notion of liquidity and its different forms and the interactions that may exist between them. This paper aims to present a synthesis of reflections on banking liquidity. First, it discusses the different theoretical approaches to the concept and typology of the liquidity concept. Then, it presents the different liquidity risks. Finally, it discusses the main theoretical underpinnings of interactions between types of liquidity.

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Available abstract

The recent financial crisis of 2007-2008 highlighted the important role of liquidity in the banking system. Financial markets around the world have run out of liquidity and many financial institutions have gone bankrupt due to liquidity problems. Nevertheless, liquidity remains a very complex concept to define because of its polymorphic character. Only recently has the literature focused on defining the notion of liquidity and its different forms and the interactions that may exist between them. This paper aims to present a synthesis of reflections on banking liquidity. First, it discusses the different theoretical approaches to the concept and typology of the liquidity concept. Then, it presents the different liquidity risks. Finally, it discusses the main theoretical underpinnings of interactions between types of liquidity.

Key concepts: Market liquidity, Accounting liquidity, Liquidity crisis, Liquidity risk, Liquidity premium, Funding liquidity, Typology, Business

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