What is a key indicator of a bank's liquidity?

A key indicator of a bank's liquidity is its ability to pay obligations. Liquidity refers to the capacity of a bank to meet its short-term liabilities without incurring significant losses. When a bank has strong liquidity, it can quickly convert its assets into cash or quickly obtain cash to settle obligations as they come due. This ability ensures that the bank can fulfill withdrawal requests from depositors and meet other financial commitments, which is crucial for maintaining trust and stability in the banking system.

While issuing new loans, generating earnings before taxes, and managing long-term debt are important aspects of a bank's overall financial health, they don't directly measure how quickly or effectively the bank can cover its immediate obligations. Therefore, the focus on the ability to pay obligations accurately captures the essence of liquidity in a banking context.