Bank's Liquidity

Essay by amiblueUniversity, Bachelor'sB, August 2009

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Table of ContentsPart A.1Part B.3Part C.12Part D.14Part E.16References18Appendices.23Part A.

Nowadays, liability management tends to be very important in providing sufficient liquidity for banks funding activities. (Blackwell, Kidwell, Peterson & Whidbee, 2007). Liability management involves the decisions concerning bank liabilities, which subject to the amount of liability funding and the mix of liabilities that a bank decides to use to satisfy its funding requirements (Gup, Avram, Beal, Lambert & Kolari, 2007).

The primary sources of bank's liabilities are classified into deposits and non-deposits. The main variation between them is depositors will gain a priority over the non-depositors for the amount of their assets improperly mingled with the fund (Gup et al., 2007).

Current deposits, fixed deposits, certificates of deposits and others such as saving account and card account are all under deposits (Gup et al., 2007).

Current deposits are deposits with no specific maturity date and no minimum balances that can be withdrawn by issuing cheques or through card or electronic transactions; it has categorized into non-interest bearing and interest bearing (Hunt & Terry, 2008).

Conversely, fixed-term deposits are funds placed in accounts for an agreed period with a fixed interest rate (Hunt & Terry, 2008). However, there is minimum balance requirement and penalty may incurred if withdrawal done without prior notice (Gup et al., 2007). Therefore, banks could provide some promotions and incentives such as offer competitive deposits rate and initial sign-up bonuses and gifts and advertise them to attract more deposits.

While bank's non-deposits that issued to adjust liquidity demand for short periods include liabilities due to clearing houses and financial institutions, bill acceptances, repurchase agreements (repos), promissory notes, corporate bonds and other long term borrowings (Rose & Marquis, 2006; Gup et al., 2007).

Bill acceptance is an undertaking to redeem a commercial bill when the borrower defaults on...