Summary of Getting a Grip on Liquidity

Notes from the Vault

Paula Tkac

Federal Reserve Bank of Atlanta, 3/2016

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Liquidity is a concept financial market participants regularly refer to but don’t often agree on.

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In attempting to define pornography, Supreme Court Justice Potter Stewart quipped, “I know it when I see it.” In the case of liquidity, the quote would most likely be “I know it when I don’t see it.” Liquidity can mean many things to many people, but all agree that its absence is bad. Economist Paula Tkac thinks it’s time to get a grip on this slippery idea. getAbstract recommends Tkac’s thoughtful introduction and outline of liquidity to financial professionals.

In this summary, you will learn

What liquidity entails
How different types of liquidity interact
Why understanding liquidity is still a work in progress

Summary

Bankers, traders and regulators each have their own definition of “liquidity”: “Institutional liquidity” – This is the capacity of a financial institution to handle short-term mismatches between its assets and liabilities. Banks typically raise short-term funds to make long-term loans...

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