Question

4. Bank management involves both “liquidity management” and “capital

management.” Explain.

Answer 1

Liquidity Management in Bank involve managing asset and liability side. Banks main liabilities are the deposits from the customers which mainly involves saving account deposits which are generally for shorter terms. Other deposits are fixed deposits which are for longer term including 5,10,15 years etc. With this deposits bank provides loans to the customer which varies from from 1 year to 30 years generally. Liquidity management is matching this loans vs. deposits so that bank should be able to meet deposits withdrawal by customers or any other short term. Using short term deposits to give long term loan can results mismanagement in liquidity

Capital Management in Bank involves managing various tier of capital including Tier 1 Tier 2 capital. Capital provides the cushion against the any loss occurred due investing in risky assets. Hence having sufficient capital against risk weighted assets is important thing for the bank. Tier 1 is considered most safest type of capital. Hence should have certain minimum percentage of Tier 1 and Total capital vs. risk weighted assets.