This week we will be covering chapter 13 of the textbook, Bank Risk Management and Performance. In this week's discussion I want to focus on one of the biggest (if not the biggest) risks that banks face, liquidity. Bank liquidity was one of the biggest problems banks faced during the housing bubble burst (2005/06) and the Great Financial Crisis (2008/09) which led the U.S. government and FED to do a lot of things that have now become standard operating procedure. Historically, banks have always had to think about liquidity and the problems they could have if they over-extended themselves. The difference between the last 100 years and further back in the past, are the incentive structures.
Please address the following questions:
1. what is liquidity risk?
2. What are some sources of liquidity that the average bank in the U.S. has?
3. If a bank lacks the liquidity it needs, where can it go to solve the problem in the short-run?
4. Can you think of some reasons why banks today might be more likely to have liquidity issues than banks in the past? note: think of incentive structures in the past versus today.