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TFM Liquidity Management

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Rajib Ali bhutto
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11 views

TFM Liquidity Management

Uploaded by

Rajib Ali bhutto
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Liquidity Management

11-2

Introduction
• One of the most important tasks the management of any
financial institution faces is ensuring adequate liquidity at
all times
• A financial firm is considered to be “liquid” if it has ready
access to immediately spendable funds at reasonable cost
at precisely the time those funds are needed.
• Lack of adequate liquidity can be one of the first signs that
a financial institution is in trouble
• A financial firm can be closed if it cannot raise sufficient
liquidity.

Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.
11-3

The Demand for and Supply of Liquidity


• Demands for Liquidity
▫ Customer deposit withdrawals
▫ Credit requests from quality loan customers
▫ Repayment of nondeposit borrowings
▫ Operating expenses and taxes
▫ Payment of stockholder dividends
• Supplies of Liquid Funds
▫ Incoming customer deposits
▫ Revenues from the sale of nondeposit services
▫ Customer loan repayments
▫ Sales of bank assets
▫ Borrowings from the money market
Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.
11-4

The Demand for and Supply of Liquidity


(continued)
• These various sources of liquidity demand and supply come
together to determine each financial firm’s net liquidity position
at any moment in time
• That net liquidity position (L) at time t is

• Liquidity Deficit is Lt < 0 and Liquidity Surplus is Lt > 0


Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.
11-5

The Demand for and Supply of Liquidity


(continued)
• The essence of liquidity management problems for
financial institutions
1. Rarely are demands for liquidity equal to the supply of
liquidity at any particular moment in time
▫ The financial firm must continually deal with either a
liquidity deficit or a liquidity surplus.
2. There is a trade-off between liquidity and profitability
▫ The more resources are tied up in readiness to meet
demands for liquidity, the lower is that financial firm’s
expected profitability (other factors held constant)

Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.
11-6

Strategies for Liquidity Managers

• Identify strategies for liquidity management


▫ Asset Liquidity Management or Asset Conversion Strategy
▫ This strategy calls for storing liquidity in the form of liquid assets (T-
bills, fed funds loans, CDs, etc.) and selling them when liquidity is
needed
▫ Borrowed Liquidity or Liability Management Strategy
▫ This strategy calls for the bank to purchase or borrow from the
money market to cover all of its liquidity needs
▫ Balanced Liquidity Strategy
▫ The combined use of liquid asset holdings (Asset Management) and
borrowed liquidity (Liability Management) to meet liquidity needs

Copyright © 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.

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