Question

Why bank must hold liqudity and in what form

Answer 1

Liquidity in banks is their ability to meet the obligations at the time of their dues. A major function of commercial banks is to provide liquidity to its customers. Banks normally have liquidity in the form of cash or cash equivalent investments and if it needs liquidity beyond that then it purchase liquidity from borrowing additional cash in the money markets to meet its requirement. Cost of borrowing additional cash is more for the banks in comparison of maintaining liquidity by its own resources.