Definition of liquidity

Cash, cash equivalents and other assets (liquid assets) that can be easily converted into cash (liquidated). In the case of a market, a stock or a commodity, the extent to which there are sufficient buyers and sellers to ensure that a few buy or sell orders would not move prices very much. Some markets are highly liquid; some are relatively illiquid. [1]

The term also means how easy it is to perform a transaction in a particular security or instrument. A liquid security, such as a share in a large listed company or a sovereign bond, is easy to price and can be bought or sold without significant price impact. With an illiquid instrument, trying to buy or sell may change the price, if it is even possible to transact. [2]

Banks need to hold enough to cover expected demands from depositors, creditors and counterparties. During the global financial crisis it became clear that many assets were a lot harder to sell than banks had expected. Now the Basel Committee plans to require banks to keep enough liquid assets, such as cash and government bonds, to get through a 30-day market crisis. There will also be a second ratio that tries to match a bank's overall liquidity needs to its liabilities over a longer timeframe. [3]

Q & A: Global body lays down the rules over governance