Question

Write short on Safety and Liquidity Principle of Bank.

Answer 1

1. Liquidity:

Liquidity is an important principle of bank lending. Bank lend for short periods only because they lend public money which can be withdrawn at any time by depositors. They, therefore, advance loans on the security of such assets which are easily marketable and convertible into cash at a short notice.

A bank chooses such securities in its investment portfolio which possess sufficient liquidity. It is essential because if the bank needs cash to meet the urgent requirements of its customers, it should be in a position to sell some of the securities at a very short notice without disturbing their market prices much. There are certain securities such as central, state and local government bonds which are easily saleable without affecting their market prices.

SAFETY

Answer 2

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The principles of Safety and Liquidity of a Commercial Bank are explained below :

$\underline{ \bold{ \red{ \: \: Principles \: \: of \: \: Safety \: : \mapsto \: }}} \\ \\ \: \: \: \: \: \: \: \: \: \: \: \text{The principle of Safety of commercial } \\ \text{bank is said to be the principle of investing } \\ \text{in which an investor only purchases securities } \\ \text{when their market price is significantly below } \\ \text{their intrinsic value. A commercial bank } \\ \text{accepts deposits from its customers and then } \\ \text{invests it. But, since the bank is investing the } \\ \text{investor’s money , it keeps the} \\ \text{safety of the money first.}$

$\underline{ \bold{ \red{ \: \: Principle \: \: of \: \: Liquidity : \mapsto \: \: }}} \\ \\ \: \: \: \: \: \: \: \: \: \: \: \: \text{The principle of liquidity is one of the } \\ \text{important principle for the commercial bank. } \\ \text{The term Liquidity refers to the ability of an } \\ \text{asset to convert into cash without loss within } \\ \text{a short time. Therefore, paying the deposited } \\ \text{money on demand of customers of the bank } \\ \text{is called liquidity in the sense of banking.}$