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Explaining financial system liquidity


A brochure explaining how liquidity works in the New Zealand financial system.

The financial system is said to be liquid when financial institutions can easily raise cash, either by selling ‘liquid assets’ or by borrowing in the wholesale money market. The most liquid assets held by banks are their ‘settlement cash’ deposits at the Reserve Bank and assets that can be discounted on demand at the Reserve Bank (i.e. quickly converted to cash). These assets are important to the trading banks in particular, because they require cash during each trading day, and especially at the end of it, in order to settle their accounts with each other. However, liquidity is also used for other purposes.