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Your money and the financial system Page 12 Why is a bank’s liquidity important If a large number of depositors and investors try to withdraw their money unexpectedly, a bank can run short of cash. In normal times withdrawals from a bank are fairly predictable. Solvent bank LIABILITIES A solvent bank holds enough cash and liquid assets to pay out fully to its depositors on demand. In the balance sheet picture, the white box labelled LIQUID ASSETS is larger than to the box labelled WITHDRAWALS. A BANK BALANCE SHEET ASSETS WITHDRAWALS – BY DEPOSITORS – BY INVESTORS DEPOSITS – MONEY IN CURRENT ACCOUNTS – MONEY IN SAVINGS ACCOUNTS LIQUID ASSETS – CASH – DEPOSITS AT BANK OF ENGLAND – GOVERNMENT BONDS LOANS – TO HOUSEHOLDS – TO BUSINESSES – TO OTHER BANKS BONDS – MONEY FROM BOND SALES TO INVESTORS CAPITAL – SHAREHOLDERS’ MONEY – RESERVES FROM PAST PROFITS
Page 13 A bank is insolvent if withdrawals by a bank’s depositors and investors exceed its cash and liquid assets. In the balance sheet picture, the white box labelled WITHDRAWALS is larger than the box labelled LIQUID ASSETS. The financial regulator requires banks to hold minimum amounts of cash and liquid assets to ensure withdrawals can be paid in full. This could happen if depositors lose confidence in a bank, fearing their money is not safe. But big surges in withdrawals from a bank are rare. A BANK BALANCE SHEET LIABILITIES ASSETS If banks unexpectedly run short of cash and liquid assets, the Bank of England is able to lend money on a temporary basis to preserve the stability of the financial system. Insolvent bank WITHDRAWALS – BY DEPOSITORS – BY INVESTORS LIQUID ASSETS – CASH – DEPOSITS AT BANK OF ENGLAND – GOVERNMENT BONDS DEPOSITS – MONEY IN CURRENT ACCOUNTS – MONEY IN SAVINGS ACCOUNTS LOANS – TO HOUSEHOLDS – TO BUSINESSES – TO OTHER BANKS BONDS – MONEY FROM BOND SALES TO INVESTORS CAPITAL – SHAREHOLDERS’ MONEY – RESERVES OF PAST PROFITS
Page 1 and 2: Your money and the financial system
Page 3 and 4: Page 3 The Bank of England is able
Page 5 and 6: Page 5 In the UK, the high-street b
Page 7 and 8: Page 7 Each day the financial syste
Page 9 and 10: Page 9 ASSETS A bank uses its capit
Page 11: Page 11 A bank is insolvent if its
Page 15 and 16: Page 15 The Financial Policy Commit
Page 17 and 18: BUILDING SOCIETIES Page 17 The FPC
Page 19 and 20: Page 19 The PRA uses judgement to f
Page 21 and 22: Page 21 Only banks and building soc
Page 23 and 24: Page 23 YOUR MONEY AND THE FINANCIA

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