DEFINITION of 'Core Liquidity'

Cash and other financial assets that banks possess that can easily be liquidated and paid out as part of operational cash flows. Examples of core liquidity assets would be cash, government bonds and money market funds. Banks typically use forecasts to anticipate the amount of cash that account holders will need to withdraw, but it is important that banks do not over-estimate the amount of cash and cash equivalents required for core liquidity because unused cash left in core liquidity cannot be used by the bank to earn increased returns.

BREAKING DOWN 'Core Liquidity'

For example, assume that XYZ bank can charge 15% interest on loans. In the event that the bank over-estimates the amount of core liquidity needed by $100,000, the bank will miss out on $15,000 worth of revenue because it has $100,000 in cash tied up that can't be used for lending.

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