When liquidity shocks become correlated during times of turbulence, an institution may experience pressures in a number of areas of its balance sheet simultaneously, thus underscoring the importance of an enterprise-wide assessment of a bank's risk profile when considering liquidity risk management and capital adequacy. 5 Ideally, assessment of potential liquidity risks should be fully integrated into a bank's capital analysis.
Economic theory tells us that the real interest rate is the price that equates the supply of savings with the demand for funds aimed at financing investment. Supply and demand, in turn, are determined by factors such the preference of households to smooth consumption across time and the productivity of capital.