Question

Briefly explain the different ways bank can do its liquidity management. Explain with example.

Answer 1

Liquidity means availability of liquid cash at the time of need.

Banks are institutions which should always have certain percentage of cash as liquid money as per the central bank regulations because,

for example, there are certain types of deposits like demand deposits, which means money should be payable to the customers when the customer demands,therefore in order to maintain the customers banks should have good reserves of liquid money.

Some General guidelines:

1. Should develop a proper structure in the banks regarding money on day to day basis.

2. Giving priority towards opinions of senior employees because they have immense experience and they can give valuable suggestions for liquidity mangement.

3. Bank must implement central information system which help to analyse and understand how smooth and transparent money exchange to taking place.

Different ways include,

a) Proper asset and liability management. Management should have general understanding regarding the excellant management of assets and liabilities.

b) Fluctuations in interest rates can also cause trouble in the moneyy flow, bank should maintain proper financial risk strategies to takle the issue

c) ALways maintaing a cash level which prepares them to a pay legal obligations like demand deposits, interest payments etc

These are some of the ways in which banks do there liquidity managemnt