Market Liquidity

Markets to provide liquidity are created on several levels of the monetary system, by deficit and surplus agents. Amounts paid for shipments in wholesale trade can be large enough not to let them rest on suppliers’ accounts but to be tied up in the form of short- term deposits or short-term securities. Banks must be ready to provide solutions for surplus agents’ problems (i.e. excess liquidity) in the short run because, on the other hand, deficit agents (for instance, firms who have to finance their production before they could realise revenues from sales) apply for liquidity loans. When a loan is granted, money is created and serves as the liquidity of the debtor. Thus, the bank does not lend out its own reserves, but when the debtor spends this money, reserves are pumped out of the bank. This liquidity, as mentioned above, can be re-borrowed on the interbank market, however, it is better if it comes back indirectly or even does not leave the bank. If some costumer of Bank A deposits excess money balances in Bank B then a reserve flow between the two banks is generated. In this wise, banks can compete for liquidity by creating attractive saving instruments. It is worth to emphasise that the subject of this competition is not the deposit itself. Deposits are liabilities of banks, and who wants to be liable? It is the additional liquidity – generated by the excess deposits – that the banks compete for, so that they can lend more on its ground.