FIN 323 Chapter 11
Commercial Banking
FIN 323
Dr. Mehdi MILI
Associate Professor
Department of Economics and Finance, CBA, University of Bahrain, Bahrain.
1
Academic year
2014-2015
Chapter 11
Liquidity and Reserves Management:
Strategies and Policies
2
This chapter has a lot of theory that is not written in the slides, reading the book is essential.
3
Intro
Key
1.
2.
3.
4.
5.
6.
Topics:
Sources of Demand for and Supply of
Liquidity
Why Financial Firms Have Liquidity
Problems
Liquidity Management Strategies
Estimating Liquidity Needs
The Impact of Market Discipline
Legal Reserves and Money Management
4
Intro
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
This suggests that a liquid financial firm either has
◦ The right amount of immediately spendable funds on hand when they are required
◦ They can raise liquid funds in timely fashion by borrowing or selling assets 5
The Demand for and Supply of Liquidity
Demand for Liquidity
Supply of Liquidity
Customer deposit withdrawals
Incoming customer deposits
Credit requests from quality loan customers Revenues from the sale of nondeposit services
Repayment of non-deposit borrowings Customer loan repayments
Operating expenses and taxes
Sales of bank assets
Payment of stockholder dividends Borrowings from the money market
6
The Demand for and Supply of Liquidity
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
7
The Demand for and Supply of Liquidity
Liquidity Position interpretation:
NLP
Position
Decision
Lt < 0
Deficit
Sources of funds
Lt > 0
Surplus
Investment decision 8
The Demand for and Supply of Liquidity
- Liquidity has an important time dimension
- Liquidity needs:
a. Immediate
b. Long term: seasonal, cyclical and trend factor -
FIN 323
Dr. Mehdi MILI
Associate Professor
Department of Economics and Finance, CBA, University of Bahrain, Bahrain.
1
Academic year
2014-2015
Chapter 11
Liquidity and Reserves Management:
Strategies and Policies
2
This chapter has a lot of theory that is not written in the slides, reading the book is essential.
3
Intro
Key
1.
2.
3.
4.
5.
6.
Topics:
Sources of Demand for and Supply of
Liquidity
Why Financial Firms Have Liquidity
Problems
Liquidity Management Strategies
Estimating Liquidity Needs
The Impact of Market Discipline
Legal Reserves and Money Management
4
Intro
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
This suggests that a liquid financial firm either has
◦ The right amount of immediately spendable funds on hand when they are required
◦ They can raise liquid funds in timely fashion by borrowing or selling assets 5
The Demand for and Supply of Liquidity
Demand for Liquidity
Supply of Liquidity
Customer deposit withdrawals
Incoming customer deposits
Credit requests from quality loan customers Revenues from the sale of nondeposit services
Repayment of non-deposit borrowings Customer loan repayments
Operating expenses and taxes
Sales of bank assets
Payment of stockholder dividends Borrowings from the money market
6
The Demand for and Supply of Liquidity
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
7
The Demand for and Supply of Liquidity
Liquidity Position interpretation:
NLP
Position
Decision
Lt < 0
Deficit
Sources of funds
Lt > 0
Surplus
Investment decision 8
The Demand for and Supply of Liquidity
- Liquidity has an important time dimension
- Liquidity needs:
a. Immediate
b. Long term: seasonal, cyclical and trend factor -