CHAP_09_Liquidity & Reserve Management-Strategies & Policies

CHAP_09_Liquidity & Reserve Management-Strategies & Policies

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William Chittenden edited and updated the PowerPoint slides for this edition. LIQUIDITY & RESERVE MANAGEMENT: Chapter 9
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Key topics 1. Liquidity: Supply and Demand 2. Liquidity management strategies 3. Estimating liquidity needs 4. Legal reserves and money position management 5. Factor in choosing reserve sources 7-2
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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: Deposits and withdrawals; Loan disbursements and loan payments 11-3
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Supplies of liquid funds Incoming customer deposits Revenues from the sale of non-deposit services Customer loan repayments Sales of bank assets Borrowings from the money market 11-4
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Demands for liquidity Customer deposit withdrawals Credit requests from quality loan customers Repayment of non-deposit borrowings Operating expenses and taxes Payment of stockholder dividends 11-5
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11-6
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A financial firm’s net liquidity position L = Supplies of liquid funds - Demands for liquidity Liquidity deficit (L < 0) Liquidity surplus (L > 0) Time dimension of liquidity immediate liquidity (CD due to mature, deposit withdrawn tomorrow) longer-term liquidity (arising from seasonal, manager must plan how, when & where liquid fund can be raised 11-7
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Quick quiz: Comprehensive problem Suppose that a bank faces the following cash inflows and outflows during the coming week: 1. deposit withdrawals are expected to total $33 million ; 2. customer loan repayments are expected to amount to $ 108 million ; 3. Operating expenses demanding cash payment will probably approach $51 million ; 4. Acceptable new loan requests should reach $294 million ; 5. Sales of bank assets are projected to be $ 18 million ; 6. New deposits should total $ 670 million ; 7. Borrowings from the money market are expected to be about $ 43mil ; 8. Non-deposit service fees should amount to $ 27 million ; 9. Previous bank borrowings totaling $ 23mil are scheduled to be repaid; 10. A dividend payment to bank stockholders of $140 million is scheduled. What is this bank’s projected net liquidity position for the coming week? 11-8
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Quick quiz: Comprehensive problem L = Supplies of liquid funds - Demands for liquidity = (108 + 18 + 670 + 43 + 27 + 23) – (33 + 51 + 294 + 140) = 889 – 518 = 371 L > 0 Liquidity surplus
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Rarely are the demands for liquidity equal to the supply of liquidity at any particular moment. The financial firm must continually deal with either a liquidity deficit or surplus There is a trade-off between liquidity and profitability. The more resources tied up in readiness to meet demands for liquidity, the lower is the financial firm’s expected profitability. High liquidity
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This note was uploaded on 05/23/2011 for the course FIN 360 taught by Professor Mcgill during the Spring '11 term at Neumann.

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CHAP_09_Liquidity &amp; Reserve Management-Strategies &amp; Policies

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