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) [5 marks]

b) Banks can also fail due to inadequate capital. Briefly explain how banks are regulated in terms of their capital adequacy level and the rationale of this regulation. [4 marks]