International Banking Essay Example | Topics and Well Written Essays - 1500 words - 2

International Banking - Essay Example on whereby an organisation or business has immediate cash needs, although it has assets, its trading position is not good enough to honour all cash obligations (Machiraju, 2013). This is described as the risk of overcapitalisation and it occurs when an organisation holds a lot of assets, but lacks the ability to convert the assets into cash in the short-run. In the banking sector, the issue of liquidity risk occurs in a distinct and unique manner. One fundamental assumption of banking is that depositors are not going to withdraw all their money at once (Matz, 2011). Banks are however required to hold assets that are mainly liquid in nature and convert them to cash in a very short term (Matz, 2011). Therefore, in banking parlance, liquidity is defined as “the ability of an economic agent to exchange his existing wealth for goods and services or other assets without incurring damaging losses” (Castagna & Fede, 2013, p. 18).