Financial Times - Lexiconhttp://lexicon.ft.comTerm of the Day from the Financial Times Lexiconen(PICS-1.1 "http://www.classify.org/safesurf/" L gen true for "http://www.ft.com/" r (SS~~000 1))&copy The Financial Times Ltd 2017 'FT' and 'Financial Times' are trademarks of The Financial Times Ltd. See http://www.ft.com/servicestools/help/terms#legal1 for the terms and conditions of reuse.client.support@ft.comTue, 16 Jun 2009 01:42:55 +0100Thu, 25 May 2017 02:51:36 GMTNewspapers15http://lexicon.ft.comhttp://lexicon.ft.comFinancial Timeshttp://im.media.ft.com/m/img/rss/RSS_Default_Image.gifhttp://lexicon.ft.comliquidity crisishttp://lexicon.ft.com/Term?term=liquidity crisis<div> <p>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 crises can ultimately result in ‘a run on a bank’ and even the insolvency of the bank.</p> <p><strong>Example</strong></p> <p>According to the Treasury report, Northern Rock, the first bank failure in the 2007-8 banking crises followed a ‘reckless business model’ where nearly 30% of its funding was bought-in short-term wholesale funds that were used to finance long-term mortgage business.</p> <p>The bank was over-dependent on liability management to finance its credit business.  This is a process where banks manage liabilities, for example customer deposits, and borrow funds when needed from the markets for interbank deposits, large-sized time deposits and certificates of deposit (CD).</p> <p>When wholesale funding dried up the bank had a liquidity crisis that rapidly turned into a capital crisis.</p> </div>Wed, 13 Apr 2011 17:31:36 +0100<div> <p>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 crises can ultimately result in &lsquo;a run on a bank&rsquo; and even the insolvency of the bank.</p> <p><strong>Example</strong></p> <p>According to the Treasury report, Northern Rock, the first bank failure in the 2007-8 banking crises followed a &lsquo;reckless business model&rsquo; where nearly 30% of its funding was bought-in short-term wholesale funds that were used to finance long-term mortgage business.</p> <p>The bank was over-dependent on liability management to finance its credit business. &nbsp;This is a process where banks manage liabilities, for example customer deposits, and borrow funds when needed from the markets for interbank deposits, large-sized time deposits and certificates of deposit (CD).</p> <p>When wholesale funding dried up the bank had a liquidity crisis that rapidly turned into a capital crisis.[ref url=""]&nbsp;Philip Molyneux, professor of banking and finance, Bangor Business School[/ref]</p> </div>