Liquidity Management

 Liquidity Management

Cash is considered as the most liquid assets. Cash must be in right place at right time. Liquid assets include the total currencies, foreign currencies, gold, silver, coins, government securities, first class securities etc. which are also known as liquidity of bank. An optimal liquidity management framework should address actual and potential cash needs. Safety, diversification and accessibility of cash and short term investments and alternative and contingent funding sources.

Demand of bank liquidity is due to ;

withdrawals of customer deposits 

acceptable loan request

Repayment of non-deposit borrowings 

Payment of interest

Operating expenses and taxes 

Payment of interest 

Expansion and growth

Cash reserve ratio

All sources of bank funds are known as the supply of bank liquidity. There should be proper balance between demand of bank liquidity and supply of bank liquidity. The major sources of bank liquidity are :

Customer deposits 

Interest on bank loan 

Revenue from sale of non-deposit services 

Borrowing from money market

Sale of assets

Loan repayment 

Reserve funds 

Share capital

Liquidity Principles 

1. Understand and categorize your cash needs, then determine your appropriate liquidity requirement.

2. Establish appropriate investment guidelines focusing on availability and safety.

3. Select investment types within guidelines that are appropriate for each cash category.

4. Establish and verify diversified Contingent funding sources.