Deposit Taking and Lending in UK

  • Liabilities: these refer to customer deposits in these institutions. Banks are liable to meet these claims
  • Sight deposits: current accounts
  • Time Deposits: these require notice of withdrawal
  • Assets: A banks are cash and loans to customers

Wholesale deposits and loans: by firms who want to deposit of borrow large sums of money. Very large loans are often split between banks (syndicated). Inter bank lending has also grown enormously. The rate at which they charge to each other is known as the London Inter-Bank Offer Rate (LIBOR). LIBOR has a major influence on the other rates that banks charge

Liquidity and Profitability

Profitability. Lending money out at a higher rate of interest than that paid to depositors makes profits

Liquidity. This is the ease at which an asset can be converted into cash without a loss
            Cash is perfectly liquid
            Money at call to other financial institutions is highly liquid

Other assets such as personal loans can only be redeemed when consumers pay them back.

Financial institutions must maintain sufficient liquidity in their assets to meet the demands of depositors

These conflicts with profitability generally the more liquid an asset is the lower the liquidity it has

Liquidity Ratio. The proportion of a bank’s assets held in liquid form