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LIQUIDITY AND RESERVES MANAGEMENT: STRATEGIES AND POLICIES

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LIQUIDITY AND RESERVES MANAGEMENT: STRATEGIES AND POLICIES Liquidity This is the Availability of Cash in the Amount and at the Time Needed at a Reasonable Cost. The size and volatility of cash requ ... irements affect the liquidity position of the bank. Examples of transaction that affect the bank’s cash balance and liquidity position are; Deposits and withdrawals; loan disbursements and loan payments. Supplies of Liquid Funds • Incoming Customer Deposits • Revenues from the Sale of Nondeposit Services • Customer Loan Repayments • Sales of Bank Assets • Borrowings from the Money Market Demands for Liquidity • Customer Deposit Withdrawals • Credit Requests from Quality Loan Customers • Repayment of Nondeposit Borrowings • Operating Expenses and Taxes • Payment of Stockholder Dividends IllustrationA Financial Firm’s Net Liquidity Position L = Supplies of Liquid Funds - Demands for Liquidity Illustration Suppose that a bank faces the following cash inflows and outflows during the coming week: (a) deposit withdrawals are expected to total $33 million, (b) customer loan repayments are expected to amount to $108 million, (c) operating expenses demanding cash payment will probably approach $51 million, (d) acceptable new loan requests should reach $294 million, (e) sales of bank assets Concept Check are projected to be $18 million, (f) new deposits should total $670 million, (g) borrowings from the money market are expected to be about $43 million, (h) nondeposit service fees should amount to $27 million, (i) previous bank borrowings totaling $23 million are scheduled to be repaid, and (j) a dividend payment to bank stockholders of $140 million is scheduled. What is this bank’s projected net liquidity position for the coming week? (In millions of dollars) Cash Inflows Cash Outflows Customer Loan Repayments $108 Deposit Withdrawals $33 Sales of Bank Assets 18 Operating Expenses 51 New Deposits 670 New Loan Requests 294 Money-Market Borrowings 43 Repayment of Previous Borrowings 23 Nondeposit Service Fees 27 Dividend to Stockholders 14 0 Total Cash Inflows $866 Total Cash Outflows $541 Net Liquidity Position Total Cash Total Cash Projected for = Inflows - Outflows the Coming Week = $866 million - $541 million = + $325 million Assignment Suppose that a bank faces the following cash inflows and outflows during the coming week: a) deposit withdrawals are expected to total $33 million; b) customer loan repayments are expected to amount to $108 million; c) Operating expenses demanding cash payment will probably approach $51 million; d) Acceptable new loan requests should reach $294 million; e) Sales of bank assets are projected to be $18 million; f) New deposits should total $670 million; g) Borrowings from the money market are expected to be about $43 million; h) Nondeposit service fees should amount to $27 million; i) Previous bank borrowings totaling $23 million are scheduled to be repaid; and j) A dividend payment to bank stockholders of $140 million is scheduled. [Show More]

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