A “liquidity gap” is basically the difference between our liquid assets (i.e. cash or things that can quickly be converted to cash) and our liabilities.
For example, if a person owes $120,000 in student loans but has $600,000 in the bank, their liquidity gap is positive: they owe a lot less than they have. (Which kind of makes us wonder why they haven’t just paid off the loan already, but that’s none of our business.) On the flip side, if we owe $120,000 and don’t have any liquid assets, our liquidity gap is negative: we owe more than we’ve got on hand to pay it off.
It’s not just individuals who should mind the liquidity gap, though. For example, if banks don’t have enough cash on hand to fund their customers’ requests, whether we’re talking loans or ATM withdrawals, they have a liquidity gap. And if an organization takes out a loan to, say, fund the development of a new product line, and then that product ends up being super lame and they can’t sell it, they might find themselves in a negative liquidity gap.
Speaking of banks and loans, though, if we apply for a loan and have a significant negative liquidity gap that doesn’t show any signs of shrinking soon, we might end up paying a higher interest rate on what we borrow, since the bank might be a little skeptical that we’ll be able to pay them back.
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Finance: What is Liquidity?64 Views
Finance a la shmoop what is liquidity all right liquidity is
not this but liquidity is this alright liquidity or being liquid is the ability [A pool of water]
to pay for things with cash and in some parts of the world
moose pelts most pelts get your moose belt here five for a dollar you might own 4,000 acres of [Man wearing a hat stood by his land]
land in Alaska most your neighbors are well
moose but when you go into your local Ford dealer to buy a Ford f-150 with the
pimped-out tires and the intentionally off-road package the dealer wants to be [Man purchasing a Ford F150]
paid in cash not in Moose pelts. if you sold those pelts for cash and then paid
him and then you'd be liquid like the rest of the moose well in the real world [A table full of moose juice]
liquid things are stuff like stocks and publicly traded bonds and anything you
can find on eBay that'll turn into cash in less than a week or so original [Website showing Barbie doll and car for sale]
edition of Avengers comic yeah the one where Iron Man and Captain America share
their first kiss and that that one's as good as sold now on the flip side of the [Coin flipped]
coin long term investments like funding two kids in a garage who are building a
search algorithm with likely 10 years or more before an IPO [Kids using a computer in a garage]
yeah those investments are highly illiquid as in the opposite of cash
immediately on hand because there are rarely any other buyers of the private [Man playing the piano to a crowd]
company shares you bought when you invested in them at least not buyers for
a long illiquid time meaning that most people simply won't give you cash for
shares in a company with no profits little don't know revenues or even no [Graph of profits and revenue for a company]
website. So is your home liquid? err not so much but you can borrow against
it liquidly in other words sometimes
illiquid things can allow you to have liquidity you know like if you have a [Man stood by a home holding a mortgage paper]
mortgage of say a hundred grand on a home that's probably worth well over
half a million bucks then any bank will most likely let you borrow a couple
hundred grand pretty much at any time you want [Man borrowing home owner more money]
if you pledged the home as collateral in other words if you don't pay the bank
back they're going to start parking in your garage and pickin out drapes for [Car reversing into garage]
the living room as they repossess it to pay off the money you borrowed from them [Bank man repossessing the home]
promising to pay it back well fortunately this isn't a chemistry course so
there's no need to learn about the solidity and gas-idity[Examples of solids and gas]
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