{"id":7091,"date":"2020-11-16T09:12:00","date_gmt":"2020-11-16T09:12:00","guid":{"rendered":"http:\/\/onlineclassesguru.com\/?p=7091"},"modified":"2020-11-16T09:12:00","modified_gmt":"2020-11-16T09:12:00","slug":"managing-liquidity-risk-on-the-balance-sheet","status":"publish","type":"post","link":"https:\/\/onlineclassesguru.com\/index.php\/2020\/11\/16\/managing-liquidity-risk-on-the-balance-sheet\/","title":{"rendered":"Managing Liquidity Risk on the Balance Sheet"},"content":{"rendered":"<style type=\"text\/css\"><\/style><p>Chapter 21 Managing Liquidity Risk on the Balance Sheet 633<\/p>\n<p>and lending these funds to the borrower) or by stored liquidity management (decreasing the DI\u0092s excess cash assets from $9 million to $4 million). We present balance sheets that result from each of these two policies in Table 21\u00967 .<\/p>\n<p>Measuring a Bank\u0092s Liquidity Exposure<\/p>\n<p>Having discussed the sources of liquidity risk for a DI, we next look at several methods currently used to measure the extent of a DI\u0092s liquidity risk exposure. These methods take into account the DI\u0092s excess cash reserves and its ability to raise additional purchased funds. Appendix 21A (located at the book\u0092s Web site, www.mhhe.com\/sc5e) looks at two additional measures of liquidity risk that will be used by DI regulators beginning in the mid- and late-2010s to evaluate DIs\u0092 exposure to liquidity risk.<\/p>\n<p>Sources and Uses of Liquidity. As discussed above, a DI\u0092s liquidity risk arises from the ongoing conducting of business, such as a withdrawal of deposits or new loan demand, and the subsequent need to meet these demands by liquidating assets or borrowing funds. Therefore, a DI manager must be able to measure the DI\u0092s liquidity position on a daily basis, if possible. A useful tool is a net liquidity statement, which lists sources and uses of liquidity and, thus, provides a measure of a DI\u0092s net liquidity position. Such a statement for a hypothetical U.S. bank is presented in Table 21\u00968 .<\/p>\n<p>The DI can obtain liquid funds in three ways. First, it can sell its liquid assets such as T-bills immediately with little price risk and low transaction costs. Second, it can borrow funds in the money\/purchased funds market up to a maximum amount (this is an internal guideline based on the manager\u0092s assessment of the credit limits that the purchased or borrowed funds market is likely to impose on the bank). Third, it can use any excess cash reserves over and above the amount held to meet regulatory imposed reserve requirements. In Table 21\u00968 , the DI\u0092s sources of liquidity total $14,500 million. Compare this to the DI\u0092s uses of liquidity\u0097in particular, the amount of borrowed or purchased funds it has already utilized (e.g., fed funds, RPs borrowed) and the amount of cash it has already borrowed from the Federal Reserve through discount window loans. These total $7,000 million. As a<\/p>\n<p>LG 21-3LG 21-3<\/p>\n<p>TABLE 21\u00968 Net Liquidity Position (in millions)<\/p>\n<p>Sources of Liquidity<\/p>\n<p>1. Total cash-type assets $ 2,000 2. Maximum borrowed funds limit 12,000 3. Excess cash reserves 500<\/p>\n<p>Total $14,500<\/p>\n<p>Uses of Liquidity<\/p>\n<p>1. Funds borrowed $ 6,000 2. Federal Reserve borrowing 1,000<\/p>\n<p>Total $ 7,000 Total net liquidity $ 7,500<\/p>\n<p>TABLE 21\u00967 Adjusting the Balance Sheet to a Loan Commitment Exercise (in millions)<\/p>\n<p>Purchased Liquidity Management Stored Liquidity Management<\/p>\n<p>Cash assets $ 9 Deposits $ 70 Cash assets $ 4 Deposits $ 70 Nonliquid assets 96 Borrowed funds 15 Nonliquid assets 96 Borrowed funds 10<\/p>\n<p>Equity 20 Equity 20<\/p>\n<p>$105 $105 $100 $100<\/p>\n<p>sau34663_ch21_627-649.indd 633sau34663_ch21_627-649.indd 633 7\/28\/11 11:00:35 AM7\/28\/11 11:00:35 AM<\/p>\n<p>itzlily<br \/>\n??<br \/>\n????DI????????????????????????DI????????????????????????DI???????????????????????21A(???????www.mhhe.com\/sc5e)??????????????????2010???????DI???????????????DIs??????????<br \/>\nitzlily<br \/>\n??<br \/>\n??????????? ?????DI??????????????????????????????????????????????????????? ???DI??????????DI??????? ??????????????????????????????????DI?????????? ?21\u00968?????????????????? DI???????????????????????????????????????????????????????\/????????????????(??????????????????????????????????????????)?????????????????????????????????????????21-8??DI??????????145???????DI??????????\u0097\u0097?????????????????(????????RPs??)?????????????????????????70???????DI???????7.75???????????????????????????<br \/>\n634 Part 5 Risk Management in Financial Institutions<\/p>\n<p>result, the DI has a positive net liquidity position of $7,500 million. These liquidity sources and uses can be tracked easily on a day-by-day basis.<\/p>\n<p>The net liquidity position in Table 21\u00968 lists management\u0092s expected sources and uses of liquidity for a hypothetical bank. All DIs report their historical sources and uses of liquidity in their annual and quarterly reports. Appendix 21B to this chapter (located at the book\u0092s Web site, www.mhhe.com\/sc5e ) presents the June 2010 Sources and Uses of Funds Statement for Bank of America. As a DI manager deals with liquidity risk, historical sources and uses of liquidity statements can be useful tools for determining where future liquidity issues may arise.<\/p>\n<p>Peer Group Ratio Comparisons. Another way to measure a DI\u0092s liquidity exposure is to compare certain of its key ratios and balance sheet features\u0097such as loans to deposits, core deposits to total assets, borrowed funds to total assets, and commitments to lend to assets ratios\u0097with those for DIs of a similar size and geographic location (see Chapter 12 ). A high ratio of loans to deposits and borrowed funds to total assets and\/or a low ratio of core deposits to total assets means that the DI relies heavily on the short-term money mar- ket rather than on core deposits to fund loans. This could mean future liquidity problems if the DI is at or near its borrowing limits in the purchased funds market. Similarly, a high ratio of loan commitments to assets indicates the need for a high degree of liquidity to fund any unexpected takedowns of these loans by customers\u0097thus, high-commitment DIs often face more liquidity risk exposure than do low-commitment DIs.<\/p>\n<p>Table 21\u00969 lists the 2010 values of these ratios for the banks we reviewed in Chapter 12 : Webster Financial Corporation (WBS) and Bank of America Corporation (BAC). Neither of these banks relied heavily on borrowed funds (short-term money market instruments) to fund loans. Their ratio of borrowed funds to total assets was 17.41 percent and 27.96 percent, respec- tively. Their ratio of core deposits (the stable deposits of the DI, such as demand deposits, NOW accounts, MMDAs, other savings accounts, and retail CDs) to total assets, on the other hand, was 70.54 percent and 57.20 percent, respectively. As a major money center bank, Bank of America gets more of its liquid funds from the borrowed funds markets than core deposit mar- kets. Webster Financial, a smaller, consumer-oriented bank, uses core deposits much more than borrowed funds to get its liquid funds. The result is that Bank of America is subject to greater liquidity risk than Webster Financial. Furthermore, WBS had a ratio of loan commitments to total assets of only 20.40 percent, while BAC had a much greater ratio of 70.48 percent. If these commitments are \u0093taken down\u0094 (see Chapters 11 and 19 ), BAC must come up with the cash to fulfill these commitments, more so than WBS. Thus, BAC was exposed to substantially greater liquidity risk from unexpected takedowns of these commitments.Peer Group Ratio Comparison assignment:<br \/>\n\u0093Three ratios commonly used are: Core Deposits\/Assets (core deposits to total assets), Loans\/Deposits (Loans to deposits), and Loan Commitments\/Assets (loan commitments to assets).<br \/>\n\u0093Answer these questions on 1 page (double-spaced):<br \/>\n1. Discuss how peer group ratio comparison works.<br \/>\n2. Discuss the purpose of each ratio and how each ratio is related to liquidity risk.<br \/>\n\u0093Whats the difference between core deposits and deposits?<br \/>\n3. What does each ratio say about how likely a bank is to rely on borrowed funds?<\/p>\n<p>*Do not plagiarize from the textbook, use your own words. See pages 633-634. You may use other sources as long as you cite them.<\/p>\n<p><center><a href=\"http:\/\/onlineclassesguru.com\/orders\/ordernow\"><img decoding=\"async\" src=\"https:\/\/encrypted-tbn0.gstatic.com\/images?q=tbn:ANd9GcTyj99p60XCLyLk1htB7-1neRt8-2QdnenNlQ&usqp=CAU\"target=\"_http:\/\/onlineclassesguru.com\/orders\/ordernow\"\/><\/center><p>","protected":false},"excerpt":{"rendered":"<p>Chapter 21 Managing Liquidity Risk on the Balance Sheet 633 and lending these funds to the borrower) or by stored liquidity management (decreasing the DI\u0092s excess cash assets from $9 million to $4 million). We present balance sheets that result from each of these two policies in Table 21\u00967 . Measuring a Bank\u0092s Liquidity Exposure&#8230;<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-7091","post","type-post","status-publish","format-standard","hentry","category-uncategorized"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v17.0 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Managing Liquidity Risk on the Balance Sheet - onlineclassesguru<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/onlineclassesguru.com\/index.php\/2020\/11\/16\/managing-liquidity-risk-on-the-balance-sheet\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Managing Liquidity Risk on the Balance Sheet - onlineclassesguru\" \/>\n<meta property=\"og:description\" content=\"Chapter 21 Managing Liquidity Risk on the Balance Sheet 633 and lending these funds to the borrower) or by stored liquidity management (decreasing the DI\u0092s excess cash assets from $9 million to $4 million). 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