"Counterparty withdrawals and credit denials resulting in a loss of liquidity--not inadequate capital--caused Bear's demise, " Cox said in a March 20 letter to international banking regulators.

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The fundamental problem we're facing here is not some sort of short-term loss of confidence or short-term loss of liquidity as much as it is the fundamental problem of we need to work ourselves out of this huge housing bubble.

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The central bank, which was simultaneously battling a loss of confidence in the currency, created liquidity to bail out the banks, then soaked it up to prop up the currency.

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It also leaves you with little liquidity to deal with emergency situations such as the potential loss of employment.

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The good news is that big banks probably now have enough capital to absorb the aggregate loss rate suffered by the system from 2007 to 2009 (although their build-up of liquidity reserves has been patchier).

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Stock declines by banks facing liquidity challenges but which are otherwise solvent may lead to further credit tightening and a loss of confidence in those companies, it added.

FORBES