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McGraw-Hill/Irwin
Bank Management and Financial
11-2
Liquidity
The Availability of Cash in the Amount and
at the Time Needed at a Reasonable Cost
The size and volatility of cash requirements
affect the liquidity position of the bank
Examples of transaction that affect the
banks cash balance and liquidity position:
Deposits and withdrawals; loan
disbursements and loan payments
McGraw-Hill/Irwin
Bank Management and Financial
11-3
11-4
11-5
McGraw-Hill/Irwin
Bank Management and Financial
11-6
L =
McGraw-Hill/Irwin
Bank Management and Financial
11-7
11-8
McGraw-Hill/Irwin
Bank Management and Financial
11-9
11-10
McGraw-Hill/Irwin
Bank Management and Financial
11-11
11-12
Liquid Asset
Must Have a Ready Market So it Can Be
Converted to Cash Quickly
Must Have a Reasonably Stable Price
Must Be Reversible So an Investor Can
Recover Original Investment with Little
Risk
McGraw-Hill/Irwin
Bank Management and Financial
11-13
McGraw-Hill/Irwin
Bank Management and Financial
11-14
11-15
11-16
McGraw-Hill/Irwin
Bank Management and Financial
11-17
Disadvantages
11-18
11-19
McGraw-Hill/Irwin
Bank Management and Financial
11-20
McGraw-Hill/Irwin
Bank Management and Financial
11-21
McGraw-Hill/Irwin
Bank Management and Financial
11-22
McGraw-Hill/Irwin
Bank Management and Financial
11-23
McGraw-Hill/Irwin
Bank Management and Financial
11-24
McGraw-Hill/Irwin
Bank Management and Financial
11-25
Capacity Ratio
Loan Commitment Ratio
Pledged Securities Ratio
McGraw-Hill/Irwin
Bank Management and Financial
11-26
McGraw-Hill/Irwin
Bank Management and Financial
11-27
Legal Reserves
Assets That a Central Bank Requires
Depository Institutions to Hold as a
Reserve Behind Their Deposits or
Other Liabilities
Assets Can Be Used for This Purpose:
1) Cash in the Vault; 2) Deposits Held
in a Reserve Account With the
Central bank.
McGraw-Hill/Irwin
Bank Management and Financial
11-28
Any deficit above 4% may be assessed an interest penalty equal to the Central Bank
Reserves discount (primary credit) rate at the beginning of the month plus 2
percentage points applied to the amount of the deficiency.
Repeated reserve deficits lead to increased regulatory scrutiny, possibly damaging its
efficiency.
McGraw-Hill/Irwin
Bank Management and Financial
11-29
Other Options
McGraw-Hill/Irwin
Bank Management and Financial
11-30
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McGraw-Hill/Irwin
Bank Management and Financial