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Unformatted text preview: CHAPTER 11 LIQUIDITY AND RESERVE MANAGEMENT: STRATEGIES AND POLICIES Goal of This Chapter : The purpose of this chapter is to explore the reasons why financial institutions often face heavy demands for immediately spendable funds (liquidity) and learn about the methods they can use to prepare for meeting their cash needs . Key Topics in This Chapter Sources of Demand for and Supply of Liquidity Why Financial Firms Have Liquidity Problems Liquidity Management Strategies Estimating Liquidity Needs The Impact of Market Discipline Legal Reserves and Money Management Chapter Outline I. Introduction: Meaning of Liquidity II. The Demand for and Supply of Liquidity A. Sources of Liquidity Demands B. Sources of Liquidity Supplies C. Net Liquidity Position and Liquidity Surpluses and Deficits Ill. Why Financial Firms Often Face Significant Liquidity Problems A. Maturity Mismatches B. Sensitivity to Changing Interest Rates C. Liquidity and Public Confidence IV. Strategies for Liquidity Managers A. Asset Liquidity Management (or Asset Conversion) Strategies B. Borrowed Liquidity (Liability) Management Strategies C. Balanced (Asset and Liability) Liquidity Management Strategies D. Guidelines for Bank Liquidity Managers V. Estimating Liquidity Needs A. The Sources-and-Uses-of-Funds Approach B. The Structure-of-Funds Approach C. Liquidity Indicator Approach D. The Ultimate Standard for Assessing Liquidity Needs: Signals from the Marketplace 1. Public Confidence 2. Stock Price Behavior 3. Risk Premiums on CDs and Other Borrowings 143 4. Loss Sales of Assets 5. Meeting Commitments to Credit Customers 6. Borrowings from the Federal Reserve Banks VI. Legal Reserves and Money-Position Management A. The Money Position Manager B. Legal Reserves C. Regulations on Calculating Legal Reserve Requirements 1. Reserve Computation 2. Reserve Maintenance 3. Reserve Requirements 4. Calculating Required Reserves 5. Penalty for a Reserve Deficit 6. Clearing Balances D. Factors Influencing the Money Position 1. Controllable Factors 2. Noncontrollable Factors 3. An Example 4. Use of the Federal Funds Market 5. Other Options Besides Fed Funds 6. Bank Size and Lending Reserves for Money Position 7. Overdraft Penalties VII. Factors to Consider in Choosing Among the Different Sources of Reserves A. Immediacy of Need B. Duration of Need C. Access to the Market for Liquid Funds D. Relative Costs and Risks of Alternative Sources of Funds E. The Interest-Rate Outlook F. Outlook for Central Bank Monetary Policy G. Regulations Applicable to Liquidity Sources VIII. Central Bank Reserve Requirements Around the Globe IX. Summary of the Chapter Concept Checks 11-1. What are the principal sources of liquidity demand for a financial firm?...
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