Question

Liquidity risk is a major concern for some financial institutions. For this discussion, take the position of a bank CEO. What are the best options to implement to reduce the liquidity risk and to make sure the core deposits are not drained? Explain.

Answer 1

Best options to implement to reduce the liquidity risk are as follows-

A. Matching principle should be followed by the banking company because it will help the company in order to match the duration of assets with the duration of liabilities and it will be helpful in eliminating any kind of mis management and duration gap which can be arising out of it which can lead to a lot of liquidity crisis.

B. proper synchronisation of changes in the interest rate according to the changes in the interest rates in monetary policy of the central banks.

C. proper forecasting of various cash flows associated and proper provisioning of the assets in order to avoid low asset quality.

D. they will be trying to maintain high asset quality in order to ensure a higher amount of liquidity in the organisation.

E. Proper forecasting method of bad dwbts and haircuts should be discounted in advance in order to have a proper estimation of the receivables and that can easily be met with the deposits of the bank.