Question

Discuss liquidity management of a bank and the tools and options to address liquidity by bank managers.

Answer 1

Banking liquidity refers to the willingness of a bank to fulfill its financial commitments when they are due. This may come from direct cash reserves in the currency or on account of the Federal Reserve or some other central bank. More often than not, it comes from the acquisition of securities that can be sold quickly with minimal losses. It effectively notes highly creditable securities, consisting of government bills with short-term maturity.

The liquidity shortage in a single branch or entity has system-wide consequences, so it is important that your bank is prepared for a shortfall. This means that your bank needs to have a robust Recognize and Assess liquiidity risk process.
After you've defined and predicted your bank's liquidity risk, you need to constantly Monitor all risk exposures and funding needs Depending on the size and complexity of your bank, various legal entities, business lines and foreign currencies need to be accounted for. Of course, you must always remember to account for any rules on banking enforcement that could restrict the transferability of your liquid asset.

Just like any qualified facility must conduct fire drills or emergency procedures, the bank needs to perform daily financial stress tests to foresee various possible liquidity shortfalls. Your stress tests will include both short-term and long-term scenarios that define sources of liquidity pressure and ensure that all exposures are consistent with your defined liquidity risk tolerance. Use the results of your stress tests to change your liquidity risk reduction techniques accordingly. And use these new policies and roles to establish a structured contingency funding plan (CFP) that clearly articulates your bank 's strategy to resolve liquidity shortfalls in different emergency situations.