Question

In traditional deposit management how are core deposits determined? 

 What is "liability management? "

a. What are primary reseves? 

b. List four factors which determine the level of a bank's primary reserves 

Answer 1

1. Determination of core deposits-

• Core deposits are the source of funds which is kept reserved for lending purpose by commercial banks. It provides many advantages to corporations in terms of cost determination and future cash estimation
• These are less volatile than short term Investments and provides stable returns to the banks over a period of time.
• Banks can increase their core deposits by customer incentives and local market segmenting. So that it will be helpful for them regarding lending purpose during inflation period.
• It can be determined through time deposit and multi-saving bank accounts. Hence negotiable interest payment can be predicted as well as the credit payments.

2. Liability Management

• It is one type of measurement by banks and financial institutions to maintain balance between maturity of assets and liabilities. So that liquidity position will be maintained and lending will be easily svavailab to the customers.
• It increases the cash flow amount by mitigating the risk factors associated with securities.
• Business profit will rise and the firm will be able to meet their debt obligations in time.

(a) Primary reserve

• It is the minimum amount of cash required to operate a bank or any other financial institutions. Primary reserves includes legal reserves and unpaid cheque amounts.
• It is maintained in order to measure the withdrawal activities and can be reinvested in treasury offerings as well as marketable securities.
• So that net earnings will increase. As a result the firm can be able to face adverse liquidity situations.

(b) Factors determine the level of primary reserves-

• Insurable risks needs to be covered by every financial organisations. For that purpose large amount of cash reserves are required to carry out banking operations.
• Credit reserves also required to main first line of defence and it will reduce the gap between cash reserve and operating expenses.
• Stock valuation also impact primary reserve calculation at the year end. The amount of net returns obtained from security market can be kept with primary reserve after dividend distribution. So that the long term capital investment can be projected.
• Price earnings will affect the primary reserve of banks. It must be higher in order to increase the share price and maintaining liquidity position.