Liquidity Management

6 Key excerpts on "Liquidity Management"

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  eBook - ePub

  The Principles of Banking

  • Moorad Choudhry(Author)
  • 2012(Publication Date)
  • Wiley

    (Publisher)

  In this and the next three chapters we discuss the “water of life” of banking: Liquidity Management. The recommended practices described in this chapter should not be followed because they are required by the national regulator or by the BIS, but because they are essential for any bank that wishes to continue in business on a sustained basis over the business cycle. In other words, sensible banking demands this practice; that regulators have to enforce it by fiat demonstrates the extent to which poor bank management exists in countries around the world. The central tenet of the principles of banking is that of liquidity risk management; therefore, by definition it should be part of the strategy of every bank to be able to survive a liquidity crisis. Liquidity Management is the most important risk management function in banking, at the individual bank level and at the aggregate industry level. Failure to survive a liquidity crisis is a failure of management.

  This chapter introduces and defines the concept of liquidity risk. It then covers the principles of sound Liquidity Management, before looking in detail at the elements of a bank liquidity policy statement, including (i) the liquid asset buffer, (ii) central bank funding facilities and (iii) the contingency funding plan.

  This is a long chapter, but worth persevering with as it is perhaps the most important chapter in the book.

  Bank Liquidity

  A search of “bank liquidity” on Google undertaken when writing this chapter returned “about 8,160,000 results” in 0.24 seconds. The first line of the first website on the list offered the following: Liquidity for a bank means the ability to meet its financial obligations as they come due. Bank lending finances investments in relatively illiquid assets, but it funds its loans with mostly short-term liabilities. Thus one of the main challenges to a bank is ensuring its own liquidity under all reasonable conditions.2 This definition is accurate and sufficient for our purposes, although we preferred Wikipedia's definition, which stated,

  In banking, liquidity is the ability to meet obligations when they become due.

  In other words, maintenance of liquidity at all times

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  eBook - ePub

  Financial Management for Nonprofit Organizations

  Policies and Practices

  • John Zietlow, Jo Ann Hankin, Alan Seidner(Authors)
  • 2011(Publication Date)
  • Wiley

    (Publisher)

  20 Changing the last phrase to read “to attain its mission” recasts the definition for nonprofit organizations. Gallinger and Healey allege that the failure of managers to provide adequate liquid resources to both meet near-term bills and finance growth initiatives has been the cause of as many business failures as have economic recessions. They indicate that the most fundamental objective of Liquidity Management is to ensure corporate solvency (pay bills as they become due) or ensure corporate survival. The key issues in Liquidity Management are to minimize “insolvency risk” by (1) determining how much to invest in each component of current assets and allocate funding needs to each component of current liabilities, and (2) managing these investments and allocations effectively and efficiently.

  (a) LAYERS OF LIQUIDITY.

  We can view Liquidity Management in a way useful to managers by establishing “tiers of liquidity.”21 Here the organization’s liquidity is viewed in tiers of decreasing liquidity, with six major layers of liquidity (see Exhibit 2.1 ).

  For our discussion of nonprofit Liquidity Management, it is helpful to distinguish among solvency, liquidity, and financial flexibility.

  (b) SOLVENCY.

  An organization is solvent when its assets exceed its liabilities. The larger the degree to which assets exceed liabilities, the more solvent the organization is. In the nonprofit context, this difference has been labeled positive fund balances or equity fund balances and more recently positive net assets (see Chapter 6 for definitions of these items). When evaluating solvency, we usually go one step further by computing net working capital, which equals current assets minus current liabilities. This data is available on the organization’s balance sheet, which we also detail in Chapter 6 .

  (c) LIQUIDITY.

  Further, an organization is liquid

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  eBook - ePub

  Bank Asset and Liability Management

  • (Author)
  • 2018(Publication Date)
  • Wiley

    (Publisher)

  PART 2 MANAGING LIQUIDITY RISK AND INTEREST RATE RISK Passage contains an image

  CHAPTER 4 Liquidity Management

  Learning outcomes

  After studying this chapter, you should be able to:

  1. Define key concepts used in measuring liquidity risk including the liquidity coverage ratio, the net stable funding ratio and the BCBS principles to manage liquidity risk.
  2. Describe the funding needs of banks, including loan and deposit trend forecasting, meeting liquidity gaps and liquidity planning.
  3. Explain the role of stress testing in managing liquidity.

  Introduction

  Liquidity is key to the operations of banks and other financial institutions, and managing liquidity risk is a very important function that is often overlooked. At times, the need for liquidity can override profitability or the choice of products that a bank handles. The liquidity resources of a bank are important factors in determining the credit-worthiness of the institution itself as well as the rating accorded to it by agencies like Moody's, Standard & Poor's or Fitch Ratings. At the end of the day, liquidity and solvency are inter-related. Without adequate liquidity, banks may not be able to meet their obligations, even if they have a positive balance sheet.

  Effective Liquidity Management is an intrinsic part of effective bank asset and liability management (BALM). In fact, it is almost impossible to properly manage the latter without effectively managing the former. Liquidity risk is, at the end of the day, one of the key risks that banks have to consider as part of their operations. Liquidity risk comes into play in a broad range of operational areas and can be affected by legal and tax events or regulatory requirements, to name just two examples. At its very core, liquidity risk is the risk that a bank or other authorised institution (AI) may be unable to meet its obligations as they fall due. This inability to meet obligations could be caused by a variety of factors including an AI's ability to liquidate assets or access short-term funding through discount windows or interbank facilities. Problems can also be caused by problems of liquidity in the broader market at times of crisis.1 At times of dropping interest rates or slowing economic growth, liquidity risk generally rises and drops as economic recovery kicks in and interest rates start to go up, to mention but one overly simplified example. (See Lehman Brothers case study in Chapter 7

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  eBook - ePub

  Cash Management with SAP S/4HANA

  • Dirk Neumann, Lawrence Liang(Authors)
  • 2020(Publication Date)
  • SAP PRESS

    (Publisher)

  4    Liquidity Management

  With the Liquidity Management functionality in cash management in SAP S/4HANA, SAP gives you the tool to support you in your quest to find answers and to change your static liquidity planning process into one that continuously improves.

  Liquidity Management focuses on the medium- and long-term liquidity of your company. By understanding and forecasting the company’s future liquidity, you can make informed decisions about investments, business plans, acquisitions, securing finance, and more. Your company’s current and future liquidity positions are fundamental criteria in investor valuations. A medium- and long-term liquidity forecast usually not only includes business transactions already posted in the system but also requires additional, sometimes manual, planning activities. You’ll base your liquidity plans on experience and other information outside of your SAP system, depending on the sophistication of your planning model.

  This chapter begins with an introduction to the challenges and benefits associated with Liquidity Management, showing the major processes covered by the new Liquidity Management. We’ll cover SAP Fiori apps in the context of Liquidity Management processes, and also the liquidity planning functionality available with SAP Analytics Cloud. In the final part of this chapter, we’ll go through the configuration steps required to set up Liquidity Management processes and to get the apps up and running in SAP S/4HANA.

  4.1    Liquidity Management at a Glance

  Liquidity Management is focused on future cash flows but looks at historical actual cash flow data to analyze the use and source of cash receivables and payables. Historical data is used for multiple purposes. You may need to prepare your cash flow statement as part of your legal reporting, but you’ll also want to use historical data to extrapolate your future cash flows. You’ll want to use actual data to validate your forecasts and evaluate the accuracy of your forecasts, so that you can improve on your planning and forecasting processes.

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  eBook - ePub

  Value-Based Working Capital Management

  Determining Liquid Asset Levels in Entrepreneurial Environments

  • G. Michalski(Author)
  • 2014(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  2

  Understanding and Measuring Financial Liquidity Levels

  T his chapter presents a definition of financial liquidity and liquidity-level measurements. This chapter contains four subchapters that address the specific role of short-term financial decisions, a classification of definitions of financial liquidity , sources of information about liquidity level, and liquidity-level measurements (Lazaridis and Tryfonidis 2006; Long, Malitz, and Ravid 1993; Kieschnick, Laplante, and Moussawi 2009).

  Financial liquidity definition and liquidity-level measurements

  Here we have an opportunity to present the author’s opinion on what assets should be financed with short-term funds and what the level of liquidity is in an enterprise (Michalski 2012a). The discussion also pertains to the issue of the dividing line between long-term and short-term decisions, with greater emphasis on the durability of their effects, rather than the decision-making speed. This section also attempts to answer the question: What are the short-term effects of operations under conditions of uncertainty and risk? The reason for the considerations in this section is the need to characterize the decisions that affect the level of enterprise liquidity. The research hypothesis of this monograph assumes that differences between more risk sensitive and less risk sensitive enterprises are seen in Liquidity Management. Simply because the enterprises, during financial Liquidity Management, take into account the differences in their risk sensitivity.

  2.1. Short-term and long-term financial decisions: A perspective in context of strategic and tactical decisions

  Current financial management is associated with how a managing team’s actions have an impact on the funding needed for its activity in the short term. Considerations about the long term differ in many respects from those concerned with short term.

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  eBook - ePub

  A Risk Professional�s Survival Guide

  Applied Best Practices in Risk Management

  • Clifford Rossi(Author)
  • 2014(Publication Date)
  • Wiley

    (Publisher)

  In order to meet its financial obligations to customers, vendors, debtholders, and other counterparties in a timely and cost-effective manner, SifiBank must have sufficient funds available to it when such needs arise. Liquidity defines this process for the bank and is the lifeblood of the institution. If SifiBank is unable to pay depositors on time, for instance, it poses liquidity risk to the company. Liquidity arises from both sides of the balance sheet, thus the bank must carefully manage its assets and liabilities together to meet expected and unexpected cash demands. Consequently, effective liquidity risk management must take into consideration a wide variety of factors such as the composition, dollar position, and duration of its assets and liabilities, the level and sensitivity of financial instrument prices, the volatility of cash flows, credit and market risks of its assets and liabilities, derivatives contracts, and, most importantly, the reaction of customers and markets to perceived and real adverse outcomes for the bank.

  Characteristics giving rise to bank liquidity risk include a lack of diversification in funding sources, unpredictable and volatile cash flows, overconcentration in a particular asset type and/or sector, an over-reliance on assets that have limited marketability, and dependence on funding that is acutely credit and rate sensitive. If, for example, the bank were entirely funded by wholesale deposits and lines of credit, any material adverse change in the bank’s condition could result in credit lines being withdrawn and/or funding costs to skyrocket, at the very worst possible time for the firm. Likewise, asset sales could be used to generate liquidity during stress events, but if the firm has built up an overconcentration in assets that have no observed market prices, it could greatly limit the attractiveness and use of this potential source of liquidity. The Office of the Comptroller of the Currency (OCC) provides a good representation of how various assets on a bank’s balance sheet contribute to liquidity, as shown in Figure 11.1

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