Liquidity management refers to those activities within a financial institution to ensure that holdings of liquid assets (e.g. cash, bank deposits and other financial
assets) are
sufficient
to
meet
its
obligations as
they
fall due,
including
unexpected transactions. Banks are primarily in the business of raising deposits
and making loans that transform liquid liabilities into liquid assets. It has two
broad aspects:
a. Asset Liquidity: It measures the ease with which a bank can convert its
assets into cash.
b. Market Liquidity: It measures ability to raise capital form other market participants at short notice.
1. Each bank has to formulate a suitable but specific liquidity policy
2. Based on the past information or data, ALCO or liquidity mgt committee must bring desired changes in the composition of assets and liabilities.
3. Continuous customer relationship with large borrowers, depositors and
other liability holders etc will help the bank to secure required funds
during liquidity crisis.
4. Bank should prepare contingency plan including arrangement for line of credit with large banks and suppliers of credit adverse liquidity position
arising from banks specific crisis or general market crisis.
5. The internal norms/limits may be fixed for certain type of transaction that will
have an
adverse impact or
liquidity
position. For example:
i)
borrowing from call money market as
well as
from repo market, ii)
Desired ratios for short-term liabilities to short term assets, loans to total deposits.