Google- Scholar Metrics. Toggle navigation. This work is licensed under a Creative Commons Attribution 4. Journal Metrics Google- Scholar Metrics h-index : 41 iindex : These business may have enough value in total assets to meet all these in the long-run, but if it does not have enough cash to pay them as they come due, then it will default and could eventually enter bankruptcy as creditors demand repayment.
The root of the problem is usually a mismatch between the maturities of investments the business has made and the liabilities the business has incurred in order to finance its investments. This produces a cash flow problem, where the anticipated revenue from the business' various projects does not arrive soon enough or in sufficient volume to make payments toward the corresponding financing. For businesses, this type of cash flow problem can be entirely avoided by the business choosing investment projects whose expected revenue matches the repayment plans for any related financing well enough to avoid any missed payments.
Alternatively, the business can try to match maturities on an ongoing basis by taking on additional short-term debt from lenders or maintaining a sufficient self-financed reserve of liquid assets on hand in effect relying on equity holders to make payments as they come due. Many businesses do this by relying on short-term loans to meet business needs.
Often this financing is structured for less than a year and can help a company meet payroll and other demands. If a business investments and debt are mismatched in maturity, additional short-term financing is not available, and self-financed reserves are not sufficient, then the business will either need to sell other assets to generate cash, known as liquidating assets, or face default. When the company faces a shortage of liquidity, and if the liquidity problem cannot not solved by liquidating sufficient assets to meet its obligations, the company must declare bankruptcy.
Banks and financial institutions are particularly vulnerable to these kind of liquidity problems because much of their revenue is generated by lending long-term on loans for home mortgages or capital investments and borrowing short-term from depositors accounts. Maturity mismatching is a normal and inherent part of the business model of most financial institutions, and so they are usually in a continual position of needing to secure funds to meet immediate obligations, either through additional short-term debt, self-financed reserves, or liquidating long-term assets.
Individual financial institutions are not the only ones who can have a liquidity problem. When many financial institutions experience a simultaneous shortage of liquidity and draw down their self-financed reserves, seek additional short-term debt from credit markets, or try to sell-off assets to generate cash, a liquidity crisis can occur.
Interest rates rise, minimum required reserve limits become a binding constraint, and assets fall in value or become unsaleable as everyone tries to sell at once. The acute need for liquidity across institutions becomes a mutually self-reinforcing positive feedback loop that can spread to impact institutions and businesses that were not initially facing any liquidity problem on their own.
Entire countries—and their economies—can become engulfed in this situation. For the economy as a whole, a liquidity crisis means that the two main sources of liquidity in the economy—banks loans and the commercial paper market—become suddenly scarce. Banks reduce the number of loans they make or stop making loans altogether. Because so many non-financial companies rely on these loans to meet their short-term obligations, this lack of lending has a ripple effect throughout the economy.
In a trickle-down effect, the lack of funds impacts a plethora of companies, which in turn affects individuals employed by those firms. A liquidity crisis can unfold in in response to a specific economic shock or as a feature of a normal business cycle. For example, during the financial crisis of the Great Recession , many banks and non-bank institutions had significant portions of their cash come from short-term funds that were put towards financing long-term mortgages.
When short-term interest rates rose and real estate prices collapsed, such arrangements forced a liquidity crisis. A negative shock to economic expectations might drive the deposit holders with a bank or banks to make sudden, large withdrawals, if not their entire accounts.
This may be due to concerns about the stability of the specific institution or broader economic influences. The account holder may see a need to have cash in hand immediately, perhaps if widespread economic declines are feared. Such activity can leave banks deficient in cash and unable to cover all registered accounts.
As regards broad money issued by DCs, a single aggregate as defined in paragraph 6. Money-neutral sectors comprise the central government and nonresidents. The potential impact on domestic economic conditions is uncertain, as the predominant center of economic interest of the nonresident lies outside of the domestic economy. This principle applies as long as cross-border workers do not have a center of predominant economic interest in the economy where they work.
See paragraphs 3. The rationale, often empirically based, for such exclusion is that central government deposits do not respond to macroeconomic influences i. Further, insufficient tax and other revenue inflows may be supplemented by borrowing at short notice. The DCS, described in Chapter 7 , shows net claims on the central government as a counterpart to broad money, instead of including central government deposits as a component of broad money or as a separate liability category.
The link between broad money and the other accounts of the DCs, including net claims on central government, is described in Chapter 7. Broad money includes all money holdings of these sectors. Thus, broad money represents a particular measurement of the spending capacity or potential purchasing power of money-holding sectors. The coverage of the DC sector should be kept under continued review as the financial system evolves. In this respect, there are several exceptions as noted previously:.
Holdings of domestic currency by nonresidents and by central government may not be excluded from broad money measurement because of a lack of reliable source data. Central clearing counterparties CCPs are one example. However, the deposits of CCPs at DCs reflect their principal line of business of settling transactions among financial market participants rather than the intention of making purchases within the economy.
Thus, deposits of CCPs related to their principal line of business should not be included in broad money. To this end, direct collection of data from CCPs on their deposit balances may be necessary if DCs do not identify CCP deposit balances in the report forms used for the compilation of monetary statistics.
If feasible, data directly collected from CCPs on their deposit balances should be split between the amount related to their principal line of business and the amount maintained for operating expenses; if available, the latter should be included in broad money. The more encompassing M aggregate usually corresponds to broad money for an economy. The money aggregates, therefore, need to remain relevant to monetary policy analysis, particularly as financial institutions and markets evolve.
As explained before in this chapter, broad money is compiled using data from the sectoral balance sheets of the central bank and ODCs. As regards money-holding sectors, the broad money counterparts include gross claims of DCs on money holders. Broad money counterparts provide information on the underlying sources of broad money growth, such as credit growth to resident units other than DCs.
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