1.

(a) Australian banks are closely regulated due to the high costs of a bank failure. Banks can fail due to illiquidity. What is bank liquidity and briefly discuss how banks liquidity is regulated? (In your answer distinguish between the regulation of large and small banks and explain how banks manage their liquidity in terms of their Assets and Liabilities)

(b) Australia is going through its first recession in decades due to the Covid-19 pandemic. The banking sector therefore argues that the capital adequacy requirement imposed on banks should be loosened to help the recovery of the economy. Briefly explain the rational of this argument.