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11-2
Key Topics
Sources of Demand for and Supply of
Liquidity
Why Financial Firms Have Liquidity Problems
Liquidity Management Strategies
Estimating Liquidity Needs
The Impact of Market Discipline
Legal Reserves and Money Management
McGraw-Hill/Irwin
2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Bank Management and Financial Services, 7/e
Copyright 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.
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Introduction
One of the most important tasks the management of any
financial institution faces is ensuring adequate liquidity at all
times
A financial firm is considered to be liquid if it has ready
access to immediately spendable funds at reasonable cost at
precisely the time those funds are needed
This suggests that a liquid financial firm either has
The right amount of immediately spendable funds on hand when they
are required
They can raise liquid funds in timely fashion by borrowing or selling
assets
McGraw-Hill/Irwin
2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Bank Management and Financial Services, 7/e
Copyright 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.
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McGraw-Hill/Irwin
2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Bank Management and Financial Services, 7/e
Copyright 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.
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McGraw-Hill/Irwin
2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Bank Management and Financial Services, 7/e
Copyright 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.
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McGraw-Hill/Irwin
2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Bank Management and Financial Services, 7/e
Copyright 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.
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McGraw-Hill/Irwin
2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Bank Management and Financial Services, 7/e
Copyright 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.
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McGraw-Hill/Irwin
2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Bank Management and Financial Services, 7/e
Copyright 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.
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McGraw-Hill/Irwin
2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Bank Management and Financial Services, 7/e
Copyright 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.
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McGraw-Hill/Irwin
2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Bank Management and Financial Services, 7/e
Copyright 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.
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McGraw-Hill/Irwin
2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Bank Management and Financial Services, 7/e
Copyright 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.
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McGraw-Hill/Irwin
2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Bank Management and Financial Services, 7/e
Copyright 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.
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McGraw-Hill/Irwin
2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Bank Management and Financial Services, 7/e
Copyright 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.
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McGraw-Hill/Irwin
2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Bank Management and Financial Services, 7/e
Copyright 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.
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McGraw-Hill/Irwin
2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Bank Management and Financial Services, 7/e
Copyright 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.
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McGraw-Hill/Irwin
2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Bank Management and Financial Services, 7/e
Copyright 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.
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McGraw-Hill/Irwin
2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Bank Management and Financial Services, 7/e
Copyright 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.
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Public confidence
Stock price behavior
Risk premiums on CDs and other borrowings
Loss sales of assets
Meeting commitments to credit customers
Borrowings from the central bank
McGraw-Hill/Irwin
2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Bank Management and Financial Services, 7/e
Copyright 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.
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McGraw-Hill/Irwin
2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Bank Management and Financial Services, 7/e
Copyright 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.
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McGraw-Hill/Irwin
2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Bank Management and Financial Services, 7/e
Copyright 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.
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McGraw-Hill/Irwin
2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Bank Management and Financial Services, 7/e
Copyright 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.
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McGraw-Hill/Irwin
2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Bank Management and Financial Services, 7/e
Copyright 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.
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McGraw-Hill/Irwin
2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Bank Management and Financial Services, 7/e
Copyright 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.
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Other Options
McGraw-Hill/Irwin
2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Bank Management and Financial Services, 7/e
Copyright 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.
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EXHIBIT 112 Movements in the Effective Federal Funds Rate, Its Target
(the Intended Federal Funds) Rate, and the Discount (Primary Credit) Rate
for Depository Institutions Seeking Credit from the Federal Reserve Banks
McGraw-Hill/Irwin
2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Bank Management and Financial Services, 7/e
Copyright 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.
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McGraw-Hill/Irwin
2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Bank Management and Financial Services, 7/e
Copyright 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.
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Quick Quiz
What are the principal sources of liquidity demand for a financial firm?
What are the principal sources from which the supply of liquidity comes?
Why do financial firms face significant liquidity management problems?
What are the principal differences among asset liquidity management,
liability management, and balanced liquidity management?
How does the sources and uses of funds approach help a manager estimate
a financial institutions need for liquidity?
How can the discipline of the marketplace be used as a guide for making
liquidity management decisions?
What are sweep accounts? Why have they led to a significant decline in
the total legal reserves held at the Federal Reserve banks by depository
institutions operating in the United States?
What impact has recent financial reform legislation had on raising shortterm cash?
McGraw-Hill/Irwin
2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
Bank Management and Financial Services, 7/e
Copyright 2013 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.