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Session - 9 - FIN 441 Bank Management Electronic Banking...

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Bank Management & Electronic Banking FIN 441
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2 Session 9 Liquidity Management
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3 Session 9 : Liquidity Management Introduction ** A bank is considered to be liquid if it has ready access to  immediately spendable funds at reasonable costs at precisely  the time those funds are needed.  **  In  extreme  cases  liquidity  risk  problems  develop  into  solvency risk problems. 
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4 Session 9 : Liquidity Management Causes of liquidity risk Liquidity risk arises for two reasons.  a. Liability side reason b. Asset side reason Liability-side reason  occurs when an FI’s liability holders,  such  as  depositors  seek  to  cash  in  their  financial  claims  immediately.  The  second  cause  of  liquidity  risk  is  asset-side  liquidity  risk  – supplying loan commitments. 
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5 Session 9 : Liquidity Management Causes of liquidity risk A loan commitment allows a customer to borrow funds from  an FI (over a commitment period) on demand.  When  a  borrower  draws  on  its  loan  commitment,  the  FI  must fund the loan on the balance sheet immediately, this  creates a demand for liquidity. 
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6 Session 9 : Liquidity Management Liability-side Liquidity risk **  Core deposits  – Those deposits that provide a DI with a  long-term funding source.  **  Net  deposit  drain  –  The  amount  by  which  cash  withdrawals exceed additions; a net cash outflow.  A DI can manage a drain on deposits in two major ways:  a. Purchased liquidity management  b. Stored liquidity management 
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7 Session 9 : Liquidity Management Liability-side Liquidity risk a. Purchased liquidity management:
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