Question

disadvantages of liquidity on banks

Answer 1

Solution:

Liquidity refers to the assets which can be converted into cash easily in no time or less time helping banks to cope up with the customer's demand deposit withdrawal.

Following are the disadvantages of liquidity on banks :

1) Excessive liquidity in banks leads to loss of opportunity of earning from loan assets.

2) More liquidity can also lead to the shrinking of net interest margin as deposits with bank tends to be more which leads to more interest payments.