FIN 701 Study Guide - Guaranteed Investment Certificate, Market Liquidity, Landing Vehicle Tracked
3 Dec 2013
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Risk of fi"s assets becoming relatively illiquid when liquid claims are suddenly withdrawn (or no renewed) To reduce risk of liquidity crisis, fi can insulate balance sheets from liquidity risk by managing liquid asset positions or managing liability structure of portfolio. Liquid assets traded in active market where even large transactions in asset do not move market price or move it very little. Non-liquid assets promise additional returns or liquidity risk premiums to compensate fi for relative lack of marketability and often greater default risk of the instrument. Excessive illiquidity exposes fi to risk of bank run, inability to meet required payments on liability claims, insolvency, and contagious effects that negatively impact other fis. Minimum liquid asset reserve requirements depend on liquidity risk exposure perceived for fi"s type and other regulatory objectives. Composition of fi"s liquid asset portfolio, especially cash and government securities, determined by earnings considerations and type of minimum liquid asset reserve requirements central bank imposes.
