Question

What are the advantages and disadvantages of a bank holding more cash? What are the advantages and disadvantages of large banks having to meet minimum LCR requirements?

Answer 1

Cash is the basis of any operation in a bank. Therefore bank take utmost care while dealing with cash. More cash with the bank is as dangerous as no cash with it. It is extremely essential for bank to have a proper cash management system through which it maintains optimum cash balance with it.

Following section describes the advantage and dua advantage of holding more cash.

Advantages

1. Ensures liquidity

Cash is required for day to operation and meeting withdrawal needs of customers. Bonding more cash can unsure liquidity to the bank which enables it to meet various requirements without looking for funds from outside.

2. Low borrowing costs

When bank is self sufficient with requisite cash, it does nt have to borrow from outside. This can help the bank from incurring excess costs on borrowing.

3. Good management

When bank holds more cash it fulfills the needs of customers whenever they rise, and this is seemed to be a sign of good management from the point of view of customers.

Disadvantages

1. Opportunity cost

Holding more cash means keeping idle funds which have alternate uses. This is called the opportunity cost ie., The potential return that excess cash could fetch if it was invested properly.

Holding more cash with the bank is extremely undesirable . Always banks are required to maintain only optimum cash balance.

The liquidity coverage ratio requirements was mandated in Basel 2015 norms. LCR requires banks to hold highly liquid assets with it to meet it's requirements readily. The advantage is that with investments in liquid assets the large banks can sell them off when needs arise. The disadvantage is that it is less likely to lend short term loans .