Manish-Kumar.pdf - ARTICLE NO.3 LIQUIDITY RISK MANAGEMENT IN BANK A CONCEPTUAL FRAMEWORK Manish Kumar Assistant Professor Shaheed Bhagat Singh Evening

Manish-Kumar.pdf - ARTICLE NO.3 LIQUIDITY RISK MANAGEMENT...

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AIMA Journal of Management & Research, May 2013, Volume 7, Issue 2/4, ISSN 0974 – 497 Copy right© 2013 AJMR-AIMAARTICLE NO.3 LIQUIDITY RISK MANAGEMENT IN BANK:ACONCEPTUAL FRAMEWORKManish Kumar Assistant Professor, Shaheed Bhagat Singh Evening College, University of Delhi, Delhi Ghanshyam Chand Yadav Assistant Professor, Shaheed Bhagat Singh Evening College, University of Delhi, Delhi Abstract:Liquidity is a bank’s capacity to fund increase in assets and meet both expected and unexpected cash and collateral obligations at reasonable cost and without incurring unacceptable losses. In the context of banking, liquidity, or the ability to fund increases in assets and meet obligations as they come due, is critical to the ongoing viability of the banking institution. Since there is a close association between liquidity and solvency of banks, sound liquidity management reduces the probability of banks becoming insolvent, thus reducing the possibilities of bankruptcies and bank runs. Ultimately, prudent liquidity management as part of the overall risk management of the banking institutions ensures a healthy and stable banking sector.Effective liquidity risk management helps ensure a bank’s ability to meet its obligations as they fall due and reduces the probability of an adverse situation developing. This paper examines the sound practices for the liquidity risk management in banks. The paper goes along with the suggestions of the Basel Committee and Reserve Bank of India on management of liquidity risk. In this paper, we explain the meaning of liquidity, liquidity risk and liquidity risk management. It also discusses the process of building up of a liquidity risk management system. Keywords: Liquidity Risk, Liquidity Risk Management, Basel Committee. I.Introduction Liquidity is a bank’s capacity to fund increase in assets and meet both expected and unexpected cash and collateral obligations at reasonable cost and without incurring unacceptable losses. Liquidity risk is the inability of a bank to meet such obligations as they become due, without adversely affecting the bank’s financial condition. Effective liquidity risk management helps ensure a bank’s ability to meet its obligations as they fall due and reduces the probability of an adverse situation developing. This assumes significance on account of the fact that liquidity crisis, even at a single institution, can have systemic implications. Traditionally, liquidity has been defined as: .the capacity of financial institutions to finance increases in their assets and comply with their liabilities as these mature. Bank liquidity has two distinct but interrelated dimensions: liability (or cash) liquidity, which refers to the ability to obtain funding on the market and asset (or market) liquidity, associated with the possibility of selling the assets. Both concepts are interrelated, and the interaction between them tends towards their mutual reinforcement.
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