Bank Liquidity Management

Bank Liquidity Management - minimum are called excess...

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Bank Liquidity Management From Last Time Net worth is equal to assets minus liabilities. It's what would be leftover if you sold all your assets and paid off your debt. Free riders consume a good without paying for it. If the producers of financial information do not receive payment from all the people who use their information, then they will not provide the socially efficient quantity of information. They will produce too little because they are not being paid enough. The Balance Sheet of a Bank A balance sheet lists an entity's liabilities (the debts) and the assets (the valuable things owned by the entity). Assets = Liabilities + Net Worth The bank's liabilities are the sources of its funds. The uses of those funds are the bank's assets. Loans and government bonds are earning assets. The bank receives income from these assets. The cash the bank keeps on hand is called reserves. The bank's required reserves are specified as a percentage of deposits (the required reserve ratio). Any reserves held in excess of this legal
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Unformatted text preview: minimum are called excess reserves. So, total reserves (TR) = required reserves (RR) + excess reserves (ER). Banks make profits by borrowing short (issuing deposits) and lending long (making loans). Liquidity Management Banks need to have sufficient reserves. Liquidity management refers to the acquisition of sufficiently liquid assets to meet the obligations of the bank to depositors. The bank manager needs to make sure that the bank has enough ready cash to pay its depositors when there are deposit outflows. If a bank has ample reserves, a deposit outflow does not necessitate changes in other parts of its balance sheet. Suppose the bank had no excess reserves. options: 1. reduce loans by $9m 2. sell $9m of securities 3. borrow reserves from the Fed 4. borrow from other banks or corporations Banks hold excess reserves as insurance against the costs associated with deposit outflows and to prevent bank failures....
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Bank Liquidity Management - minimum are called excess...

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