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CAIIB-ABM-MOD-D-Liquidity Management

Liquidity Management

  • Bank's liquidity management is the process of generating funds to meet contractual or relationship at reasonable prices at all times.
  • Good management information systems, central liquidity control, analysis of net funding requirements under alternative scenarios, diversification of funding sources, and contingency planning are crucial elements of strong liquidity management at a bank of any size or scope of operations.

  • The residual maturity profile of assets and liabilities will be such that mismatch level for time bucket of 1-14 days and 15-88 days remains around 80% of cash outflows in each time bucket.
  • Flow approach is the basic approach being followed by Indian banks. It is called gap method of measuring and managing liquidity
  • Stock approach is based on the level of assets and liabilities as well as off-balance sheet exposures on a particular date.
  • Ratio of Core Deposit to Total Assets: - Core Deposit/Total Assets: More the ratio, better it is.
  • Net Loans to Totals Deposits Ratio:- Net Loans/Total Deposits: It reflects the ratio of loans to public deposits or core deposits.  Loan is treated to be less liquid asset and therefore lower the ratio, better it is.
  • Ratio of Time Deposits to Total Deposits:-Time deposits provide stable level of liquidity and negligible volatility. Therefore, higher the ratio better it is.
  • Ratio of Volatile Liabilities to Total Assets:- Higher portion of volatile assets will pose higher problems of liquidity. Therefore, lower the ratio better it is.
  • Ratio of Short-Term Liabilities to Liquid Assets:- Short-term liabilities are required to be redeemed at the earliest. It is expected to be lower in the interest of liquidity.
  • Ratio of Liquid Assets to Total Assets:-Higher level of liquid assets in total assets will ensure better liquidity. Therefore, higher the ratio, better it is.
  • Liquid assets may include bank balances, money at call and short notice, inter bank placements due within one month, securities held for trading and available for sale having ready market.
  • Ratio of Short-Term Liabilities to Total Assets:-A lower ratio is desirable
  • Short-term liabilities may include balances in current account, volatile portion of savings accounts leaving behind core portion of saving which is constantly maintained. Maturing deposits within a short period of one month.
  • Ratio of Prime Asset to Total Asset - Prime Asset/Total Assets:-More or higher the, ratio better it is.
  • Prime assets may include cash balances with the bank and balances with banks including central bank which can be withdrawn at any time without any notice.
  • Ratio of Market Liabilities to Total Assets:-Lower the ratio, better it is.
  • Market liabilities may include money market borrowings, inter-bank liabilities repayable within a short period.
  • A maturity ladder should be used to compare a bank's future cash inflows to its future cash outflows over a series of specified time periods.
  • The need to replace net outflows due to unanticipated withdrawal of deposits is known as Funding risk.
  • The need to compensate for non-receipt of expected inflows of funds is classified as Time Risk
  • Call risk arises due to crystallisation of Contingent liabilities
  • Maturity ladders enables the bank to estimate the difference between Cash inflows and Cash Outflows  in predetermined periods.
  • Liquidity management methodology of evaluating whether a bank has sufficient liquid funds based on the behaviour of cash flows under the different 'what if scenarios is known as Alternative Scenarios

  • The capability of bank to withstand a net funding requirement in a bank specific or general market liquidity crisis is denoted as  Contingency planning



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