As is the case for all businesses, one obvious adverse liquidity outcome for banks is the inability to pay liabilities as they fall due. And, liquidity risk is even broader, including the realization of a market loss as a result of the premature or forced sale of assets to raise liquidity and loss of business opportunity or franchise due to a lack of liquidity.1 But, banks face even more difficult liquidity challenges than do most businesses. Banks protect customers against liquidity problems by taking in money which can be withdrawn on demand or at short notice, and by providing committed loan facilities to corporate customers and overdraft facilities to personal sector customers. By insuring others against liquidity risk, banks become exposed to it themselves because of the mismatch between the term structure of the assets and liabilities on the balance sheets, generally illiquid loans funded by highly liquid deposits, and on-demand off-balance sheet commitments.2

To function and prosper, banks must not maintain a prudent margin of solvency through liquid assets to maintain market and customer confidence. One potential trigger for deposit runs is fear that a

Academics rely on research on banking scale efficiency that shows that the average cost curve is a flat U-shape. This means that large banks getting even larger would be inconsistent with cost minimization. However, a wave of consolidation has swept through the U.S. banking industry, indicating that bankers obviously feel that there are economies of scale in banking.4

"As a result of fewer geographic barriers, rapid technological breakthroughs, and advances in distribution systems, it is quite plausible that the optimal scale of production may have increased."6

Bankers insist there are more economies of scale in banking. Academics insist there are none except below medium bank-size levels. Who is correct? Why?

Credit unions are nonprofit financial institutions owned and operated by their members. That means they aren't obligated to return profits to their stockholders or pay taxes as banks are; as a result, they return more earnings to credit union members in the form of better interest rates and lower fees. For example, credit unions usually offer higher interest rates on savings accounts, much lower service fees, and lower rates for auto lending than do banks. Differences in rates between banks and credit unions for other types of lending vary a bit more; for instance, b

Some common words found in the essay are:
Efficiency Act, , credit unions, banks credit unions, banks credit, credit unions offer, credit union, lending banks, cost curve, average cost curve, balance sheets, liquidity risk, banking industry, economies scale, financial products,
Approximate Word count = 869
Approximate Pages = 3 (250 words per page double spaced)