Commercial banks liquidity, a measure of the cash and other assets banks have available to pay bills and meet short-term business and financial obligations, is not stable. It varies according to different factors: bank liquidity factors.
In fact, the factors of bank liquidity are the set of events that affect banks’ liquidity and constrain them in their credit distribution. In other words, these are all the elements that cause a change in the banks’ need for refinancing from the central bank. The four factors of bank liquidity are found on the balance sheet of the central bank. these are the refinancing counterparties, namely the issuance of banknotes, foreign exchange needs, transactions with the treasury and bank reserves at the central bank. These factors can be restrictive when there is a leakage of liquidity from the banking system. As they can also be expansive, in the case where the bank is witnessing an influx of liquidity, that it has not produced, into its balance sheets.
1. Respective factors of bank liquidity:
The factors restricting bank liquidity correspond to liquidity leaks outside the banking network. These leaks are banknotes in circulation; leaks in the form of currency; operations with the public treasury; and finally the required reserves. The first three factors are qualified as autonomous. The latter is qualified as institutional because it is conditioned by the central bank.
.Leaks to the Public Treasury: customers of credit institutions are in regular contact with the Public Treasury, especially when they pay their taxes or, conversely, when the Public Treasury pays its officials. However, it turns out that the public treasury account is managed not by the banking system but by the central bank. As a result, all transactions between customers of credit institutions and the Public Treasury will affect the assets of these institutions with the central bank
.The regulation of minimum reserves: the central bank adds a final pressure factor on bank liquidity through the system of minimum reserves. Each commercial bank is obliged to keep a certain amount in its account at the central bank. This mandatory reserve amount is calculated in proportion to the mass of customer deposits (these are generally sight deposits and short-term deposits). By this mechanism, the central bank increases the need for commercial banks to refinance in central money.
2. Expansive factors of bank liquidity:
In the case where the factors of bank liquidity are expansive, regardless of their behavior, banks see their need for central bank refinancing diminish. Core money can be issued independently of bank demand – it is called unborrowed core money – In the case of non-borrowed core money, the banks’ money supply is exogenous, i.e. independent of their own activity. This scenario occurs when the central bank finances a budget deficit (by advances, or purchases of public securities), or when an influx of foreign currency occurs (inflow of capital or trade surplus).