International Banking Essay Example | Topics and Well Written Essays - 1500 words - 2

International Banking - Essay Example on whereby an organisation or business has immediate cash needs, although it has assets, its trading position is not good enough to honour all cash obligations (Machiraju, 2013). This is described as the risk of overcapitalisation and it occurs when an organisation holds a lot of assets, but lacks the ability to convert the assets into cash in the short-run. In the banking sector, the issue of liquidity risk occurs in a distinct and unique manner. One fundamental assumption of banking is that depositors are not going to withdraw all their money at once (Matz, 2011). Banks are however required to hold assets that are mainly liquid in nature and convert them to cash in a very short term (Matz, 2011). Therefore, in banking parlance, liquidity is defined as â€Å"the ability of an economic agent to exchange his existing wealth for goods and services or other assets without incurring damaging losses† (Castagna & Fede, 2013, p. 18). Liquidity risks include funding liquidity which refers to the risk of settling obligations with the central bank as it occurs. There is also the market liquidity risk which revolves around the ability of a bank to settle its obligations to stakeholders on the market. This is the â€Å"inability to realise assets due to inadequate market depth, or market disruption† (Adalsteinsson, 2014, p. 26). Bank liquidity risks can be measured both internally and externally. Internally, bank liquidity risks are defined by international conventions and practices that are placed on the authorities and directors of the bank. This is to be done through the utilisation of various formulas put forward by international entities like the Basel Conventions. Basel III proposed that bank liquidity risks can be evaluated by assessing: These are insider indices and they are often done through the utilisation of privileged information that allows banks to evaluate trends and processes in their activities and affairs. However, to the ordinary investor, there is likely