The Management of Liquidity in Commercial Banks
Bank liquidity means a bank having money where they need it particularly to satisfy the withdrawal needs of the customers. The survival of commercial banks depends greatly on how liquid they are since liquidity being a sign of imminent distress can easily erode the confidence of the public in the banking sector and results to deposit.
Liquidity management refers to the planning and control necessary. to ensure that the organization maintains enough liquid assets either as an obligation to the customers of the organization so as to meet some obligations incidental to survival of the business or as a measure to adhere to the monetary policies of the central bank. For a commercial bank to plan for or manage its liquidity position, it first manages its money position by complying with the legal requirement. Actually, management of money position is essential if a bank must avoid excesses or deficiencies of required primary reserves. Where there is a decline in market price of securities or where additional funds needed to correct the bank reserve position are for a very short time, it will be definitely expensive to sell securities than to borrow from another bank.
Moreover, it may be more desirable to borrow for bank’s liquidity needs than to call back outstanding loans or to cancel or place embargo on new loans, a situation that will reduce the existing and potential customers of a bank. Commercial banks are expected to maintain certain levels of reserves. These reserves are statutory requirements stipulated by the central bank specifying the cash reserves equal to certain fraction of the banks’ deposits or loans and advances which bank must maintain. Originally, the purpose of the reserve requirement is to compel banks to maintain a reasonable degree of liquidity in order to be able to meet cash demands. But currently, these reserves are used as control device through which the central bank can influence the monetary system.
Factors Affecting Liquidity Management in Banks:
- Statutory requirement
- Banking habits of the People
- Monetary transactions
- Nature of Money market
- Nature and size of deposit
- Liquidity policies of other banks