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Liquidity and solvency have been called the "heavenly twins" of banking (Goodhart, Charles, 'Liquidity Risk Management', Financial Stability Review - Special Issue on Liquidity, Banque de France, No. 11, February, 2008). Since these "twins" interact in complex ways, it is difficult - particularly at times of crisis - to distinguish between them, especially in the presence of information asymmetries (Information asymmetry occurs when one party has more or better information than the other, creating an imbalance of power, giving rise to adverse selection and moral hazard ). An insolvent bank can be liquid or illiquid, and a solvent bank may be at times illiquid. In the latter case, insolvency is not far away, since banking is grounded in information and confidence, and it is confidence which in the end determines liquidity. In other words, liquidity is very much endogenous, determined by the general condition of a bank, as well as the perception of it by the public and market participants. Dealing with liquidity risk is more challenging than dealing with other risks, since liquidity is the result of all the operations of a bank and it is fundamentally a relative concept which compares segments of the balance sheet on the asset and liability sides. It does not deal with absolutes, like arguably the concept of capital and it explains why there is not an internationally recognized "Liquidity Accord". This Working Paper addresses key concepts like market and funding liquidity and basic tools to address liquidity issues like cash flows, liquidity gaps and some selected financial ratios. It aims at providing an introductory guide to risk assessment and management, and provides useful and practical guidelines to undertake liquidity assessments which could prove useful in preparing Financial Assessment Programs (FSAPS) in member countries of the Bretton Woods institutions.

Balance sheet --- Banking system --- Bankruptcy and Resolution of Financial Distress --- Banks and Banking Reform --- Cash flows --- Central bank --- Currencies and Exchange Rates --- Debt Markets --- Deposits --- Emerging Markets --- Finance and Financial Sector Development --- Financial Stability --- Information asymmetries --- Information asymmetry --- International Bank --- Lender --- Liability --- Liability sides --- Liquidity --- Liquidity Risk --- Market participants --- Maturity --- Moral hazard --- Private Sector Development --- Risk Management --- Solvency --- Withdrawal

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Determinants of central banks' profitability are studied using a statistical analysis of their balance sheets, country characteristics, and the macroeconomic and institutional environments in which they operate. Central banks at both tails of the distribution of profits generally operate in poorer countries with more troubled macroeconomic and institutional environments. For these central banks, profitability is strongly influenced by fiscal dominance and, to a lesser extent, by how actively central banks used their balance sheet for monetary policy purposes.

Finance --- Business & Economics --- Banking --- Banks and banking, Central --- Monetary policy --- Econometric models. --- Banker's banks --- Banks, Central --- Central banking --- Central banks --- Banks and banking --- Accounting --- Banks and Banking --- Macroeconomics --- Central Banks and Their Policies --- Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General --- Banks --- Depository Institutions --- Micro Finance Institutions --- Mortgages --- Personal Income, Wealth, and Their Distributions --- Public Administration --- Public Sector Accounting and Audits --- Financial reporting, financial statements --- Personal income --- Financial statements --- Bank deposits --- Central bank balance sheet --- Income --- Finance, Public