Define the term "liquidity" in banking.

Liquidity in banking refers to the ease with which an asset can be converted into cash without significantly impacting its market price. This concept is crucial because a bank must maintain a certain level of liquidity to meet the demands of depositors, fulfill loan obligations, and conduct other financial transactions seamlessly.

When we say an asset is liquid, it means it can be readily sold or exchanged for cash. Cash itself is the most liquid asset, while other assets like stocks and bonds can also be liquid if they can be sold quickly at a stable price. However, assets such as real estate or collectibles are considered illiquid because selling them may take considerable time and may not yield a consistent value.

Understanding liquidity helps in assessing a bank's financial health and its ability to manage short-term obligations effectively.