Liquidity and solvency are the heavenly twins of banking, frequently indistinguishable. An illiquid bank can rapidly become insolvent, and an insolvent bank illiquid. As Tim Congdon noted, (FT, September 2007), in the 1950s liquid assets were typically 30 percent of British clearing banks’ total assets, and these largely consisted of Treasury Bills and short dated government debt. Currently, such cash holdings are about 1⁄2 percent and traditional liquid assets about 1 percent of total liabilities.
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