When bank liquidity decreases
The initial alarm signal is when a bank has no liquidity and begins to offer its savers, especially newcomers, interest rates that are far above those offered by other banks.
Wednesday, August 6, 2008
They also turn to borrowing from other commercial banks and the Central Bank. During the Great Depression (1929-1933), banks in the United States and in Guatemala had liquidity problems. Curiously, though, the Central Bank of Guatemala and the Credito Hipotecario Nacional (National Mortgage Bank) reported reduced profits during those years, although they did not end up in the red.
The local banking system started to feel the effects of the international financial crisis with credit restrictions in place from international correspondent banks.
The reduction in interest rates generated by increased liquidity in the market lowers the cost of financing for the private sector.
The funds will be used to deal with the possible lack of liquidity next year due to the international financial crisis.
The Monetary Board in charge of directing macroeconomic policies of the country opened a special account in US dollars and placed it at the disposal of the private banks to help them acquire liquidity.
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