The financial statements for most banks in the United States arrange the banks' assets in order of liquidity. In other words, they are not required to break them down and place them into separate current and non-current sections. It isn't very difficult for an investor to spot assets that would otherwise be considered current, though.

Types of Liquid Current Assets on Bank Balance Sheets

Banks in the U.S. must meet a certain liquidity coverage ratio and net stable funding ratio thresholds depending on their size, health and relationship with the Federal Reserve. Large institutions with assets in excess of $10 billion have their liquidity defined by the liquidity coverage ratio and must have sufficient high-quality current assets to cover total net cash outflows over a 30-day period.

The most liquid and secure bank assets are the balances that are kept with the central bank. These include federal funds sold and any assets tied up in repurchase agreements. Banks also lend to each other, and any balances with other banks are considered liquid current assets as well. Loans and investments made by the bank become more liquid as they approach maturity.

Banks make different kinds of loans and these are a major source of revenue for banks through their interest and principal payments. Whenever these loans make more interest than the amount paid on bank deposits, which is almost always the case, the net interest amount is considered to be a liquid asset of the bank. For example, if a bank pays out $10 million in interest on demand deposits during the course of a month but receives $25 million in interest payments from its loans, then the $15 million in net revenue counts as a liquid asset. Net interest income is often the starting point when analyzing a bank's financial statements.

The primary securities owned by banks are U.S. Treasuries and municipal bonds, which can be sold quickly on the secondary market to generate additional cash. These so-called secondary reserves are important current assets for most banks.

The Federal Reserve and Bank Liquidity

Bank liquidity requirements are set by the Federal Reserve. According to the Fed, a bank's liquidity is "a financial institution's capacity to meet its cash and collateral obligations without incurring unacceptable losses." The regulation of bank liquidity is an ongoing process under the Basel III, or Third Basel Accord, capital adequacy requirements. Most of the Basel III regulations were proposed in response to the financial crisis of 2007-2009. Basel III was implemented in September 2014, but all capital and leverage requirements will not be in place until 2019 at the earliest.

The rules that define what counts as an asset and which assets count towards liquidity requirements change from time to time. Since all deposit institutions carry protection from the Federal Deposit Insurance Corporation (FDIC) and can receive emergency loans from the Fed, liquidity carries a tentative meaning in the first place.

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  3. Are current assets liquid or capital?

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  4. Is there a downside to having a high liquidity ratio?

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