Bank's Liquidity, Capital and Deposits

Bank’s deposits can be explained as ‘’ Money placed into a banking institution for safekeeping.’’ (investopedia.com), and funding from the interbank market deals. Customers can deposit their money with the bank in a variety of accounts that most suit their needs. The bank in turn uses the money for its own investments, such as granting loans to customers and the interest rate is a way of compensating people for the use of their funds by the bank. In essence, the bank is borrowing money from depositors and paying interest like it would to any other lender. If the customer’s deposits are deficient, especially if they are adopting liability management, the bank can draw on the interbank market. Deals are done between banks to borrow and lend to meet customer demands and adjust the company’s position often benchmarked to LIBOR. Capital raised from investments is ‘’the difference between the value of a bank's assets and its liabilities’’ (investopedia.com), hence the net worth of the bank. Capital is also meant to sustain any unexpected operational losses without affecting the customer’s deposits. The Basel 3 regulation has been developed in response to the deficiencies in financial regulation revealed by the late 2000’s financial crises as banks are expected to hold an adequate amount of capital in relation to their risk taking.

Liquidity is ‘’the ability to convert an asset to cash quickly’’ (investopedia.com).
A bank has to be in a position to obtain liquidity at short notice to avoid liquidity crises. Since not all of the bank’s customer’s deposits are fixed for long periods, cash has to be made available to meet the customer’s demand. Restrictions are set on the investments as liquidity levels have to be evaluated. It may be difficult and time consuming to convert assets back to cash. The bank needs to be able to pay its own short term creditors without the need to borrow in order to attract investors to buy shares.

Explain how banks can use