Appraisal of Liquidity Management Policies and Practices in Banks


 


Liquidity management   refers to the ability of banks to fund assets and meet their financial obligations in a certain period of time.  Being liquid is very crucial in bank operation; so as to compensate for whatever expected and unexpected fluctuations that may occur in the business.  Proper preparation of additional funds for the banking business is essential to keep the banking business going. Liquidity management of policies and practices in banks is an important record of   financial standing of any bank, if it meets its obligations and still operational with its adequate monetary funds for its daily operational expenses. Appraisal management determines if bank is still liquid, it is an effective analysis of bank management liquidity.  It provides effective management in measuring the liquidity position of the bank on everyday basis.    It also examines the funding requirement needed by bank in order it to progress more under different conditions.  Furthermore,   the formality and superiority of liquidity management of a bank varies on the size and complexity of its operation; so as to the nature of its business and activities. 


(http://www.fdic.gov/regulations/safety/manual/section6-1.html)


Moreover, good management information systems, strong appraisal of funding needs for various options, as well as the diverse monetary sources and emergency planning strategy are very crucial factors of   having a strong liquidity management operation. The sufficiency of a bank’s liquidity varies on the   expected or unexpected funding needs of the financing establishment.  And, in determining the bank’s liquidity capability, requires a deep analysis on the present liquidity standing of the bank.  Likewise, it is also important to determine the future asset acquisition of the establishment, as well as the future funding requirements, and the future earning capacity of it.  By doing this, the management has the option of whether they will add or reduce their   funding.


 


(http://www.fdic.gov/regulations/safety/manual/section6-1.html)


Over many years, banking industry has been facing the problem of risk management in credit, interest rate, foreign exchange and liquidity risk.  As a matter of fact, liquidity management considered as the central point of monitoring their performance in the banking industry.  On the other hand, awareness of how to preserve the bank’s liquidity effectively, guides the bankers to have an opportunity to add value to their existing products, enhancing tighter relationships with customers and reduce the possible credit risk in loan in their collections of investment.  Maximizing bank business potentials through accounting software and information technology-based banking transactions are one of the most liquidity management tools.  These tools help the bankers to monitor their payment cycles, match assets to liabilities and calculate liquidity metrics.  It is a must that every banker understands what balance sheet can provide with them.    It likewise reduces the cost of capital and increases the bank’s asset valuation and   maximizes the ability of the bank to increase its assets through potential investments. It also protects the returns of investments of the bank, so as to minimize the leakage of enterprise capital. 


(http://www.bankersonline.com/vendor_guru/sum2/sum2_lend_040708.html)


Subsequently, the main objective for liquidity regulation of any bank is to increase the bank’s flexibility to any liquid challenges in the financial market.  At the same time, balancing the benefits against costs and expenses can reduce the risk of a bank from not capable of meeting liabilities and obligations due date.  This is also related to the consumer protection goal, as not to lose the confidence of the clients who give their trust and confidence to the bank.  Also, reducing the need for authority intervention can totally ruin the reputation of any bank.   Therefore, to avoid all these things to happen, monetary policy framework    is being implemented and applied in banking industry.  Same thing goes with the interest rate policy that many banks put on the savings deposit, time deposit, security bonds and other financial investments with the clients.  So, it is therefore important to keep in mind that a bank may be remained liquid and operational if all assets and acquisitions of it are remained intact. Plus, all the credit risks have been reduced. Being able to promote good performance credit among the borrowers or debtors, will surely make a bank free from any tendencies of becoming bankrupt.  Plus the fact that the most popular tool of monetary policy management is the issuance of credit rationing guidelines among the bank clients. This way enables to stimulate the good flow of investments in various bank investments, loans, and other cash ratios.   In the final note, in recognition the fact that well- funded and capitalized banks can even strengthen their banking system for a more effective and sufficient liquidity management.


(http://www.bankersonline.com/vendor_guru/sum2/sum2_lend_040708.html)


References:


(http://www.fdic.gov/regulations/safety/manual/section6-1.html)


(http://www.bankersonline.com/vendor_guru/sum2/sum2_lend_040708.html)



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