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.