Liquidity: How Money Enters the Banking System — and How Criminals Try to Fake It

Liquidity is the bloodstream of modern finance.

When liquidity is abundant, banks can lend, companies can finance working capital, markets can function and payments can move almost invisibly through the financial system.

When liquidity disappears, the opposite happens with extraordinary speed: credit contracts, collateral loses value, banks become defensive, investors sell assets and a liquidity problem can rapidly become a solvency crisis.

But there is a fundamental distinction that is often ignored:

There is legitimate liquidity creation — and there is the fraudulent appearance of liquidity.

The first is the normal functioning of monetary and banking systems.

The second is financial crime.

This distinction matters because criminal organisations generally do not need to literally “print money”. Their objective is often more subtle: to make money, assets, transactions or collateral appear legitimate enough for the regulated financial system to finance, transfer or accept them.

This is where banking, financial engineering, regulation and financial crime intersect.

1. What exactly is liquidity?

The word liquidity is used to describe several different things.

Central-bank liquidity refers primarily to reserves held by commercial banks at the central bank.

Funding liquidity is an institution’s ability to obtain cash or financing when it needs it.

Market liquidity describes how easily an asset can be bought or sold without causing a substantial movement in its price.

These are not the same thing.

A bank can own billions of dollars of assets and still experience a liquidity crisis if those assets cannot quickly be converted into cash or used as collateral.

That is why the modern banking system is fundamentally based on confidence, collateral and access to funding.

2. The first legal mechanism: central-bank lending

One of the oldest mechanisms is the central bank acting as lender of last resort.

In the United States, the Federal Reserve’s Discount Window provides eligible financial institutions with access to funding against acceptable collateral.

The Fed explicitly describes the facility as an important mechanism for supporting banking-system liquidity and stability. All discount-window loans must be appropriately collateralised.

The simplified mechanism is:

Eligible collateral → central-bank loan → bank receives funding → liquidity pressure is reduced.

This is not an illicit creation of money.

It is one of the foundations of modern central banking.

The Federal Reserve has three principal discount-window programmes:

• Primary Credit

• Secondary Credit

• Seasonal Credit

Primary Credit is essentially the main liquidity safety valve for institutions in generally sound financial condition.

3. Repo: the hidden plumbing of global finance

If there is one financial market that deserves much more attention from the public, it is the repo market.

A repurchase agreement is essentially secured short-term financing.

One party obtains cash.

Another party receives securities as collateral.

The transaction is structured so that the securities are subsequently repurchased.

The importance is enormous because the system effectively transforms high-quality collateral into short-term funding.

This is why collateral quality is so important.

If investors trust the collateral, financing can be cheap and abundant.

If they stop trusting it, funding can disappear extremely quickly.

The Federal Reserve uses repo operations as part of its monetary-policy implementation and liquidity-management framework.

4. The European Central Bank has its own liquidity machinery

The euro area operates through the Eurosystem’s monetary-policy framework.

Its instruments include:

• Main Refinancing Operations;

• Longer-Term Refinancing Operations;

• fine-tuning operations;

• structural operations;

• the Marginal Lending Facility;

• asset-purchase programmes.

The ECB also has Emergency Liquidity Assistance (ELA) for solvent financial institutions facing temporary liquidity problems outside normal monetary-policy operations.

This is another manifestation of the same principle:

A fundamentally viable bank can have a temporary liquidity problem.

The central bank exists partly to prevent that temporary problem from becoming a systemic crisis.

5. Quantitative easing: liquidity on an extraordinary scale

The scale becomes enormous when central banks purchase financial assets.

During the COVID-19 crisis, the Federal Reserve’s balance sheet expanded from approximately $4.2 trillion at the beginning of 2020 to $7.2 trillion by June 2020.

The Fed purchased Treasury securities and mortgage-backed securities, expanded repo operations and established additional credit and liquidity facilities.

That is approximately a $3 trillion expansion in only a few months.

Europe experienced a similarly extraordinary intervention.

The ECB initially allocated €750 billion to its Pandemic Emergency Purchase Programme, subsequently increasing the envelope by €600 billion and then another €500 billion.

The final envelope was:

€1.85 trillion

The ECB described the programme as a tool to counter the economic and financial consequences of the pandemic.

These numbers demonstrate something crucial:

Liquidity management is not a peripheral activity.

It is one of the largest financial operations undertaken by governments and central banks.

6. But central banks aren’t the only institutions creating money

This is where the subject becomes considerably more interesting.

Commercial banks create a large proportion of the money used in modern economies.

When a bank makes a loan, the simplified accounting entry is:

Bank asset: loan to customer

Bank liability: deposit credited to customer

A new deposit has been created.

The Bank for International Settlements has recently reiterated this fundamental point: most deposits are created when commercial banks make loans, with the loan creating a corresponding deposit.

This means that the simplistic idea that banks merely take existing deposits from savers and lend them to borrowers is incomplete.

Modern banking is fundamentally a credit-creation system.

The important question therefore becomes:

How much credit can the system safely create?

That is where regulation, capital, liquidity requirements, risk management and monetary policy enter the picture.

7. The banking system is ultimately based on trust

A bank deposit is a claim against a bank.

The customer trusts that the deposit can be converted into cash or transferred to another institution at par.

The banking system therefore requires a hierarchy of confidence:

customer → commercial bank → payment system → central bank

Central-bank reserves are used for settlement between banks.

Commercial-bank deposits are used extensively by households and businesses.

The BIS describes modern money precisely in these terms: different forms of money are essentially claims or liabilities between different parts of the financial system.

This leads to a fundamental conclusion:

Liquidity is ultimately inseparable from confidence.

8. Basel III: putting limits around liquidity risk

The banking system cannot simply create unlimited credit without constraints.

Basel III introduced the Liquidity Coverage Ratio (LCR) to strengthen banks against short-term liquidity shocks.

The formula is essentially:

HQLA / projected net cash outflows over 30 days ≥ 100%

HQLA means High-Quality Liquid Assets.

The Basel framework requires banks, under normal circumstances, to maintain enough qualifying liquid assets to withstand a significant 30-day stress scenario.

These assets can include, subject to the applicable rules:

• cash;

• central-bank reserves;

• high-quality sovereign securities;

• other qualifying liquid securities.

The framework also includes the Net Stable Funding Ratio (NSFR), which addresses longer-term structural funding risk.

The objective is straightforward:

A bank should not finance long-term, illiquid assets almost entirely with unstable short-term funding.

9. Where legitimate liquidity ends and financial crime begins

This is the point where terminology becomes extremely important.

An illegal financial operation normally does not create central-bank reserves.

A criminal network cannot simply decide to manufacture Federal Reserve reserves or ECB reserves.

What criminals can attempt to manufacture is the appearance of legitimate economic value.

They can try to make:

• illicit money appear to be legitimate revenue;

• nonexistent transactions appear genuine;

• weak assets appear valuable;

• nonexistent trade appear real;

• hidden ownership appear legitimate;

• fraudulent collateral appear financeable.

If a regulated institution accepts those representations, legitimate financial infrastructure can then be used to move or finance the illicit value.

That is the real vulnerability.

10. Shell companies: legal structures that can be abused

A shell company is not automatically illegal.

Companies with little physical activity can have legitimate purposes, including holding assets, restructuring businesses or facilitating transactions.

The problem is opacity.

FinCEN has warned that shell companies can be abused because their ownership and purpose may be difficult to identify.

According to FinCEN, suspicious shell-company activity has been used to move billions of dollars globally.

FinCEN identifies warning signs including:

• transfers with no clear business purpose;

• activity inconsistent with the company’s stated business;

• multiple high-value transfers between related shell entities;

• unusual international transfers;

• unexplained beneficiaries;

• transactions inconsistent with the company’s expected profile.

The important point is that the shell company does not magically create liquidity.

It creates opacity around ownership and the origin or destination of funds.

11. Trade-based money laundering

One of the most important illicit mechanisms is Trade-Based Money Laundering (TBML).

International trade creates a natural reason for large sums of money to cross borders.

A criminal organisation can attempt to exploit that legitimate infrastructure through manipulation of:

• prices;

• quantities;

• descriptions;

• invoices;

• shipping documentation.

The Financial Action Task Force identifies mechanisms including over-invoicing, under-invoicing, over-shipment and under-shipment.

The most extreme case is the so-called:

Phantom shipment

Goods are supposedly exported and imported, documentation is produced, but the physical goods do not actually move.

FATF specifically warns that banks and financial institutions can unknowingly become involved in trade financing associated with such transactions.

Again, the criminal objective isn’t to create central-bank money.

It is to create a credible economic explanation for financial transfers.

12. False invoices and fictitious services

Another risk is the use of invoices for:

• goods that were never delivered;

• services that were never performed;

• prices that bear little relation to economic reality;

• transactions between related entities without genuine commercial substance.

The invoice becomes the apparent justification for the transfer.

This is why financial institutions increasingly analyse not merely:

“Did money move?”

but:

“Why did the money move?”

13. Circular transactions

Another red flag is a series of transactions that appear economically meaningless but create the impression of substantial business activity.

For example, several related entities may repeatedly transact with one another.

On paper:

Company A → Company B → Company C → Company A

The gross transaction volume can become enormous.

But the underlying economic value may be minimal.

This is why transaction monitoring focuses increasingly on economic substance, not simply transaction volume.

A billion dollars of transfers does not necessarily mean a billion dollars of genuine economic activity.

14. The most dangerous mechanism: fraudulent collateral

This is where liquidity, leverage and fraud collide.

Banks and private lenders often provide financing against collateral.

If the collateral is genuine and appropriately valued, this is normal finance.

But if the borrower falsely represents the value, ownership, eligibility or availability of collateral, the lender can provide real money against something that is partially or completely fictitious.

A particularly important recent case is Tricolor Auto.

According to the U.S. Department of Justice, prosecutors alleged that Tricolor executives repeatedly double-pledged collateral and manipulated collateral data so that ineligible or near-worthless assets appeared to satisfy lender requirements.

By August 2025, prosecutors alleged that approximately:

$2.2 billion of collateral had been pledged

while only approximately:

$1.4 billion was real collateral.

That implied approximately:

$800 million of alleged bogus collateral.

The alleged fraud resulted in lenders extending hundreds of millions of dollars in cash advances and billions in loans based on fabricated information.

This is an extraordinarily useful case study.

It demonstrates exactly where legitimate liquidity ends and fraudulent financing begins.

15. Another documented example: 777 Partners

The same DOJ page also identifies a separate case involving 777 Partners.

U.S. prosecutors charged its co-founder in October 2025 in connection with an alleged more than $500 million fraud scheme, including allegations involving double-pledged collateral and falsified bank statements.

These cases should not be interpreted as proof that every complex financing structure is fraudulent.

They demonstrate something more specific:

Collateral integrity is fundamental to modern credit creation.

If collateral data is fraudulent, the lender’s entire risk calculation can become false.

16. Why collateral is so important

Consider a simplified balance sheet.

A lender believes it has:

$100 million of legitimate collateral

and therefore provides:

$60 million of financing.

Now imagine that only $40 million of the collateral actually exists or is eligible.

The lender has effectively financed:

$60 million against $40 million of genuine support.

The problem becomes dramatically worse when several lenders believe that they each have claims over the same collateral.

This is why double pledging is so dangerous.

The same economic asset can appear to support multiple liabilities.

The balance sheet looks larger.

The financing appears safer.

Until someone actually checks.

17. The illusion of liquidity

This brings us to the central thesis of this article.

There are two very different ways liquidity can appear.

Legitimate liquidity

Central bank:

reserves + collateral + monetary policy

Commercial bank:

credit + deposits + capital + liquidity management

Financial market:

collateral + repo + funding

Illicit or fraudulent liquidity

Criminal or fraudulent entity:

false asset + false transaction + false collateral + false documentation

Financial institution:

financing based on false information

The second process doesn’t create genuine economic value.

It creates leverage on an illusion.

18. 2008: when liquidity disappeared

The global financial crisis demonstrated what happens when the financial system loses confidence in collateral.

Mortgage-related assets had been transformed into increasingly complex securities.

Those assets were then financed through highly interconnected funding markets.

When confidence collapsed, financing conditions deteriorated rapidly.

The lesson was brutal:

An asset can have a theoretical value and still be almost impossible to finance during a crisis.

Liquidity and solvency therefore interact.

A bank can be solvent on paper and still fail because it cannot meet immediate obligations.

19. 2020: when central banks demonstrated the opposite

COVID demonstrated the other side of the equation.

In a matter of months, central banks deployed extraordinary amounts of liquidity-support measures.

The Federal Reserve expanded its balance sheet from $4.2 trillion to $7.2 trillion between the beginning of 2020 and June 2020.

The ECB created a PEPP envelope of:

€1.85 trillion

to protect financing conditions and the functioning of the euro-area economy during the pandemic.

The lesson was clear:

When the central bank is credible and collateral remains acceptable, liquidity can be expanded extraordinarily quickly.

20. Shadow banking changes the picture

The banking system is no longer limited to traditional commercial banks.

Today there are:

• private-credit funds;

• hedge funds;

• money-market funds;

• securities dealers;

• investment vehicles;

• insurance companies;

• fintech companies;

• payment institutions;

• structured-finance vehicles.

Many of these institutions do not create deposits in exactly the same way as commercial banks.

But they participate in the financing chain.

This creates what regulators often describe as non-bank financial intermediation.

The result is a much larger and more complex liquidity ecosystem.

A liquidity shock can therefore move:

bank → repo market → investment fund → securities dealer → private-credit market → bank

in ways that are not immediately visible from a traditional bank balance sheet.

21. The real problem isn’t “money printing”

Public debate often reduces the subject to:

“Central banks print money.”

That description is inadequate.

Modern monetary systems contain several layers:

Central-bank money

Banknotes and reserves.

Commercial-bank money

Deposits created largely through bank lending.

Market-based funding

Repo, commercial paper, securities and other instruments.

Asset-backed financing

Credit supported by collateral.

Shadow finance

Funding generated outside traditional deposit-taking banks.

The system therefore resembles a network rather than a single machine.

And every connection represents a potential liquidity channel — or a potential vulnerability.

22. The five questions that matter

Whenever a large liquidity movement occurs, investors, banks and regulators should ask five basic questions:

1. Where did the money originate?

Central bank?

Commercial bank?

Investor?

Fund?

Corporate cash flow?

2. What economic activity supports it?

Loan?

Sale?

Trade?

Investment?

Asset?

3. What collateral supports it?

Sovereign bonds?

Receivables?

Real estate?

Inventory?

Securities?

4. Who ultimately owns the assets?

The legal entity?

Another company?

A beneficial owner hidden behind layers of ownership?

5. Can the transaction survive independent verification?

This last question is often decisive.

Liquidity that cannot survive verification is not robust liquidity.

23. The future: tokenisation and digital liquidity

The architecture is evolving.

The BIS argues that tokenised deposits and tokenised assets could potentially integrate financial transactions more efficiently through new financial-market infrastructure.

But technology doesn’t eliminate the fundamental problem.

Whether the asset exists on paper, on a blockchain or in a traditional database, the same question remains:

What is the underlying economic claim?

A digitally recorded fraudulent asset is still fraudulent.

A tokenised fake invoice is still a fake invoice.

A blockchain cannot turn nonexistent collateral into genuine collateral.

Technology can improve transparency.

It can also accelerate fraud if controls are inadequate.

24. The paradox of modern liquidity

The modern financial system has achieved something extraordinary.

It can mobilise trillions of dollars of liquidity rapidly enough to prevent economic collapse.

But the same system can also move enormous amounts of money through highly complex networks that are difficult for regulators, banks and investors to understand completely.

That creates a paradox:

The more sophisticated finance becomes, the more sophisticated financial crime can become.

The answer is not to eliminate liquidity.

That would destroy the financial system.

The answer is to improve:

• transparency;

• beneficial-ownership identification;

• collateral verification;

• transaction monitoring;

• auditability;

• cross-border cooperation;

• regulatory supervision;

• data analysis.

25. The ultimate question

The most important question in financial liquidity is therefore not:

How much money is circulating?

It is:

How much of the apparent liquidity is backed by genuine assets, genuine transactions, genuine collateral and genuine economic activity?

That distinction can determine whether a financial system is healthy or merely highly leveraged.

Central banks can create reserves.

Commercial banks can create deposits through lending.

Markets can transform collateral into funding.

But nobody can create genuine economic value simply by creating accounting entries.

That is the line between finance and fraud.

Fintech SCB: where liquidity, risk and financial intelligence meet

Understanding liquidity is not merely an academic exercise.

It requires an integrated understanding of banking, credit, financial markets, collateral, funding structures, cross-border transactions, regulation, financial crime and the architecture of modern money.

This is also an area in which Fintech SCB specialises.

Fintech SCB analyses liquidity structures, banking flows, funding mechanisms, financial-market dynamics and the risks that arise when legitimate financial infrastructure is exploited for fraudulent or illicit purposes.

Our approach is straightforward:

Understand the mechanism. Identify the vulnerability. Quantify the risk. Distinguish legitimate finance from financial abuse.

Because in modern finance, liquidity is power.

And understanding where liquidity comes from, where it goes, what supports it and who ultimately controls it is essential to understanding the global financial system.

Fintech SCB — Financial intelligence, liquidity and global financial analysis.

Roberto Balbino — CEO, Fintech SCB.
Independent analyst of finance, economics, geopolitics and global markets.

Primary sources

• Federal Reserve — Discount Window⁠

• Federal Reserve — 2020 Monetary Policy Report⁠

• Federal Reserve Bank of New York — Discount Window⁠

• ECB — Pandemic Emergency Purchase Programme⁠

• BIS — Fundamentals of money and bank-created deposits⁠

• BIS — Basel III Liquidity Coverage Ratio⁠

• FATF — Trade-Based Money Laundering⁠

• FinCEN — Shell-company money-laundering risks⁠

• U.S. Department of Justice — Tricolor Auto case⁠