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Tut 3 TRM

The document discusses liquidity management in banks. It covers 5 key liquidity reports used by banks: 1) the loan-to-deposit ratio, which measures self-sustainability; 2) liquidity ratios, which show net cash flows and liquid assets; 3) the cumulative liquidity model, which predicts liquidity stress points; 4) the intercompany lending report, which shows cash contributors and users; and 5) the liquidity risk factor report, which shows liquidity gaps. It also notes that banks often face funding shortages due to insufficient liquidity, and that there is a relationship between liquidity, risk, and profitability as banks must balance liquidity with opportunity costs.

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Quynh Ngoc Dang
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162 views3 pages

Tut 3 TRM

The document discusses liquidity management in banks. It covers 5 key liquidity reports used by banks: 1) the loan-to-deposit ratio, which measures self-sustainability; 2) liquidity ratios, which show net cash flows and liquid assets; 3) the cumulative liquidity model, which predicts liquidity stress points; 4) the intercompany lending report, which shows cash contributors and users; and 5) the liquidity risk factor report, which shows liquidity gaps. It also notes that banks often face funding shortages due to insufficient liquidity, and that there is a relationship between liquidity, risk, and profitability as banks must balance liquidity with opportunity costs.

Uploaded by

Quynh Ngoc Dang
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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TUT 3: LIQUIDITY

Question 1: State and discuss the common approach to liquidity management:


- Management often direct Treasury and money market desk behavior by
assigning simple targets
- Market best practice is for more than the single liquidity metric, to a broader
set of measurements and reports
- Liquidity forecasts should be upgraded to incorporate better estimate of
deposit/withdrawal on the deposit side, drawings of unused direct
commiments on the loan side and assessment of the quality/liquuidity of our
near-cash assets

Question 2: Examine the five liquidity reports and discuss their purposes:
Loan-to-
deposit Ratio - The relationship between lending and customer deposits
- A very common metric, usually reported monthly
 Purpose: Measure of the self-sustainability of the
bank (each branch/subsidiary)

1 week & 1- - An effective measure of structural liquidity, with early


month liquidity warning of likely stress point
ratios - Produced weekly,one week in arrearse
- Follow a regulatory authority limit structure
 Purpose: Shows net CFs, including the cash effect of
liquidating “liquid” securities, as a percentage of
liability

Cummulative - Forward looking model of inflows, outflows. Available


Liquidity liqudity
model - Prepared daily, at legal entity level, and group level
- Prepared for material original currencies at an cosolidated
currency level
 Purpose: Recognise and predict liquidity stress
points on a cash basis
Intercompany - Measure of the self-sustainability of each branch/sub
lending report - Produced monthly
- Major KPI for Treasurers
 Purpose: Shows the net intercompany lending
position of each branch/sub
; displays cash contributors and cash users

Liquidity risk - Observe the trend over time and change to long-rn
factor averages
- Report weekly and monthly
 Purpose: Shows the aggregate size of the liquidity
gap in each branch/sub ; compares average
remaining duration of assets to average tenor of
libilities

Question 3: Why banks are often funding short? Relationship between liquidity
mismatch and profitability?

Because insufficient liquidity is one of the major reasons for bank failures. In
this case, banks do not have enough customer’s cash withdrawals or lend for those
having demand for advances. However, holding liquid assets has an
opportunity cost of higher returns. There is actuallly sometimes a positive
significant link between bank liquidity and
profitability.Neverthless, in times of instability banks may chose to increase their
cash holding to mitigate risk, which means that there is a negative correlation
between liquidity and profitability levels.
Banks are required to hold a considerable position in liquid assets while on the
other hand, they are required to be profitable for them to be sustainable. Despite
the increased efficiency in many banks resulting from holding higher positions of
liquid assets, profitability has severely suffered. Liquidity and profitability are
inversely related, when liquidity increases profitability decreases and vice versa
while on the other hand, there is a direct relationship between higher risk and higher
return, hence the dilemma in liquidity management is finding a balance between
liquidity and profitability.
TUT 3: ALM

Question 1: What are 3 main topics of ALM that we have covered? Briefly give the
description and role of each topic in TM
Liquidity managemnet

ALM Trading principles Market profit


Risk hedging

ALCO Reporting

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