Liquidity Crisis and Ratio Analysis

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Introduction

Liquidity crisis is the most talked topic in financial markets and institution today. Because of liquidity crisis many countries are facing recession in their country. The impact of liquidity crisis has affected all over the world and also in Bangladesh. Here the term liquidity means the ability to sell assets easily or get back the value of investment in cash immediately without loss of value. On the other hand liquidity crisis is a negative financial situation characterized by a lack of cash flow. It reflects a fall in asset prices below their long run fundamental price; or deterioration in external financing conditions; or a reduction in the number of market participants or simply difficulty in trading assets. The financial crisis of 2007–2008, known as the global financial crisis and 2008 financial crisis, is considered by many economists to be the worst financial crisis. It resulted in the threat of total collapse of large financial institutions, the bailout of banks by national governments, and downturns in stock markets around the world. In many areas, the housing market also suffered, resulting in evictions, foreclosures and prolonged unemployment. Many causes for the financial crisis have been suggested, with varying weight assigned by experts. Mainly the burst of U.S. housing loan is responsible for the crisis. Other things such as high risk, complex financial products, undisclosed conflicts of interest, and the failure of regulators, the credit rating agencies, and the market itself were responsible for this. Impact of liquidity crisis has spread all over the world as a result of high communication and international trade & finance. So many countries have taken step against this crisis and Bangladesh has also taken some steps to prevent liquidity crisis. Not only countries but also the central banks and commercial banks have also taken some necessary procedures to reduce the effect of liquidity crisis. Through these steps banks are not only safeguarding themselves but also are getting back the trust of customers.

Liquidity

Liquidity is the ability to meet the debt obligations immediately. High liquidity means there is a lot of capital because interest rates are low, and so capital is easily available. Low interest rates mean credit is cheap, so businesses and investors are more likely to borrow.

Liquidity Crisis

Liquidity crisis is a negative financial situation characterized by a lack of cash flow. For a single business, a liquidity crisis occurs when the otherwise solvent business does not have the liquid assets (i.e., cash) necessary to meet its short-term obligations, such as repaying its loans, paying its bills and paying its employees. A situation where depositors demand larger withdrawals than normal and banks are forced to borrow funds at an elevated interest rate. A liquidity crisis is usually unpredictable and can be due to either a lack of confidence in the specific bank, or some unexpected need for cash. Liquidity Crisis refers to drying up of liquidity, which could reflect a fall in asset prices below their long run fundamental price; or deterioration in external financing conditions; or a reduction in the number of market participants or simply difficulty in trading assets. For the economy as a whole, a liquidity crisis means that the two main sources of liquidity in the economy, banks and the commercial paper market, severely reduce the number of loans they make or stop making loans altogether. Because so many companies rely on these loans to meet their short-term obligations, this lack of lending has a ripple effect throughout the economy, causing liquidity crises at a plethora of individual companies, which in turn affects individuals.

Origin of Liquidity Crisis

The Asian Financial Crisis 1997-1998:
The stock market collapses experienced by a number of South East Asian economies in 1997 and early 1998 where highly correlated with the evolution of the...
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