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. Interbank Rate

    The interbank rate is the rate of interest charged on short-term ...
  2. Key Rate

    The key rate is the specific interest rate that determines bank ...
  3. Interbank Market

    The financial system and trading of currencies among banks and ...
  4. Squeeze

    1. In financial terms, a period of time when borrowing is difficult. ...
  5. Net Borrowed Reserves

    A statistic released in weekly Federal Reserve data showing the ...
  6. Bank Rate

    The interest rate at which a nation's central bank lends money ...
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