Assume a bank experienced a big deposits outflow and does not hold enough required reserves due...

Assume a bank experienced a big deposits outflow and does not hold enough required reserves due to its poor liquidity management. What can the bank do to raise funds and meet the required reserve amount in a short time period? Discuss the potential cost associated with these activities.

Expert Solution

When the bank is facing liquidity issues, then it should introduce lucrative financial products that would force the customer to pour the deposits in the bank. Following are the practices that the bank can imply in order to raise the funds and maintain a required reserve amount.

Introduce a lenient low-rate loan class. Many customers who were not eligible in the previous loan classes would be eligible for the loan in case of lenient loan conditions and the low-rate loan would lure the customer to prefer the bank’s loan proposal over others. The bank has to be careful about the screening of the customer as the raise of short-term funds must not result in the long-term bad debts or non-performing assets.
Introduce high-rate fixed deposit. The bank can introduce a high-rate fixed deposit plan which would lure the customers to make the investment in the bank.
Sale of assets. The bank can raise the funds by selling its fixed assets that are not adding value in the business.
Borrowing: The bank can issue debt instruments or take loans from other institutions in the form of lines of credit, federal funds and reserve bank advances.

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ekkarill92 answered 2 years ago

Assume a bank experienced a big deposits outflow and does not hold enough required reserves due...

Assume a bank experienced a big deposits outflow and does not hold enough required reserves due to its poor liquidity management. What can the bank do to raise funds and meet the required reserve amount in a short time period? Discuss the potential cost associated with these activities.

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Assume a bank experienced a big deposits outflow and does not hold enough required reserves due...

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