Question

Assume a bank experienced a big deposits outflow and does not hold enough required reserves due to its poor liquidity management. What can the bank do to raise funds and meet the required reserve amount in a short time period? Discuss the potential cost associated with these activities.

Answer 1

Measures which are needed to raise liquidity of the bank in the short term would be-

A. It can arrange the amount through liquidation of the equity and issuance of the fresh shares .these will be leading to a high flotation cost and this can also be giving a signal to the market that bank is not having enough liquidity

B. The banks can also issue rights shares to the the institutional based clients at certain price and it will be helpful for those clients to be the owners in the company and provide them with adequate fund.

C.bank can also invite private equity companies in order to raise capital in the short-term and will help the bank to gain the liquidity in the short term

D.it can also be hiring asset reconstruction companies in order to sell the loans and gain liquidity in form of realisation of cash.

E. it can also go for re capitalising itself and it will help the bank in order to improve its liquidity and assets as well

F.it can also try to lag its payments in order to improve the liquidity in the short-term. Lagging of the payment to the creditors is a good method of increase of liquid in the short term.