fin4324 chapter 11
Chapter 11
Liquidity and Reserves Management: Strategies and Policies
1. A(n) liquid asset is an asset which can be converted into cash easily, which has a relatively stable price and is reversible so that the seller can recover their original investment with little risk of loss.
2. When a financial institution sells assets to manage liquidity it faces opportunity costs. They lose the future earnings on those assets, they face transaction costs on those sales and the assets most easily sold often have the lowest return.
3. Purchased (borrowed) liquidity is when the financial institution borrows money in the money market to meet their liquidity needs.
4. The liquidity gap is the total difference between its sources and uses of funds.
5. "Hot money" liabilities are the deposits and other borrowings of the bank which are very interest sensitive or where the bank is sure they will be withdrawn during the current period.
6. The customer relationship doctrine is the idea that management should make all good loans and count on its ability to borrow funds if it does not have the liquidity to meet its cash needs.
7. Legal reserves are the assets the bank must by law hold behind its deposits. In the U.S. only vault cash and deposits held with the Federal Reserves can be used to meet these requirements.
8. A(n) clearing balance is the account the bank must have at the Federal Reserve to cover any checks drawn against the bank.
9. A(n) sweeps account is a service developed by banks where the bank shifts money out of accounts with reserve requirements and into savings accounts overnight.
10. The reserve maintenance period is a 14 day period stretching from a Thursday to a Wednesday. This is the period in which the bank has to keep their average daily level of required reserves for a particular computation period.
11. Liquidity is the availability of cash in the amount needed at a reasonable cost.
Liquidity and Reserves Management: Strategies and Policies
1. A(n) liquid asset is an asset which can be converted into cash easily, which has a relatively stable price and is reversible so that the seller can recover their original investment with little risk of loss.
2. When a financial institution sells assets to manage liquidity it faces opportunity costs. They lose the future earnings on those assets, they face transaction costs on those sales and the assets most easily sold often have the lowest return.
3. Purchased (borrowed) liquidity is when the financial institution borrows money in the money market to meet their liquidity needs.
4. The liquidity gap is the total difference between its sources and uses of funds.
5. "Hot money" liabilities are the deposits and other borrowings of the bank which are very interest sensitive or where the bank is sure they will be withdrawn during the current period.
6. The customer relationship doctrine is the idea that management should make all good loans and count on its ability to borrow funds if it does not have the liquidity to meet its cash needs.
7. Legal reserves are the assets the bank must by law hold behind its deposits. In the U.S. only vault cash and deposits held with the Federal Reserves can be used to meet these requirements.
8. A(n) clearing balance is the account the bank must have at the Federal Reserve to cover any checks drawn against the bank.
9. A(n) sweeps account is a service developed by banks where the bank shifts money out of accounts with reserve requirements and into savings accounts overnight.
10. The reserve maintenance period is a 14 day period stretching from a Thursday to a Wednesday. This is the period in which the bank has to keep their average daily level of required reserves for a particular computation period.
11. Liquidity is the availability of cash in the amount needed at a reasonable cost.