Question

Liquidity management is a key objective of financial firms as well as corporations. As a newly appointed CFO of a major bank you are concerned with the factors/forces that make you bank prone to liquidity management issues. What are some of these forces? What would be some guidelines that you may want to set up to address the liquidity issues

Answer 1

Bank liquidity can be describe as bank capacity to fund increase in assets and meet both expected and unexpected cash and collateral obligation without incurring unacceptable losses.Liquidity management is critically important for bank success.

Following are some factors that make bank prone to liquidity management issues;

i)A gap in the maturity dates of Assets and liablities

ii)Less allocation in the liquid government intruments.

iii)Low economic performance.

iv)The banks rely heavily on the short term corporate deposits.

v)Decreasing Depositors' trust on the banking sector.

Banks Should holds liquid assets as a buffer against liquidity pressures.These assets must be unencumbered, that is not pledged to other entities or tied to specific financial transactions.Futher the bank should consider putting in place certain prudential limits to address liquidity issues:

i)Duration of liablities and investment portfolio.

ii)Core deposit in relation to core assets I.e. Cash reserve ratio,Liquidity reserve ratio and loans

iii)Maximum cummulative outflows.