Liquidity Squeeze


DEFINITION of 'Liquidity Squeeze'

When concern about the short-term availability of money causes reluctance among financial institutions to lend out money from their reserves. This hold on reserves causes the interbank market rate to rise, making it more expensive for banks to borrow from each other. Ultimately, this causes credit standards to tighten, making it more difficult and expensive for consumers to receive loans.

BREAKING DOWN 'Liquidity Squeeze'

In order to limit the impact of liquidity squeezes, central banks will often increase liquidity by injecting more money into the economy through lower interest rates. Doing so gives financial institutions a less expensive alternative to borrowing. This process also serves to alleviate the fear of insufficient liquidity in the short run and make bank loans more accessible to consumers and businesses.

  1. Monetary Policy

    Monetary policy is the actions of a central bank, currency board ...
  2. Money Supply

    The entire stock of currency and other liquid instruments in ...
  3. Financial Institution - FI

    An establishment that focuses on dealing with financial transactions, ...
  4. Discount Window

    Credit facilities in which financial institutions go to borrow ...
  5. Federal Discount Rate

    The interest rate set by the Federal Reserve that is offered ...
  6. Central Bank

    The entity responsible for overseeing the monetary system for ...
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  1. How do central banks inject money into the economy?

    Central banks use several different methods to increase (or decrease) the amount of money in the banking system. These actions ... Read Full Answer >>
  2. What is a liquidity squeeze?

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  3. How long does a stock account have to be dormant before it can be escheated?

    A stock account is typically considered dormant and eligible for escheatment after five years of inactivity; however, this ... Read Full Answer >>
  4. Do banks have working capital?

    The concept of working capital does not apply to banks since financial institutions do not have typical current assets and ... Read Full Answer >>
  5. Who decides to print money in Russia?

    The Central Bank of the Russian Federation (CBRF), like its peers in most countries, is the governmental entity responsible ... Read Full Answer >>
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