slike bài giảng quản trị ngân hàng chương 9 liquidity & reserve management-strategies & policies

 The bank’s monthly liquidity needs are estimated as the forecasted change in loans plus required reserves minus the forecast change in deposits: Forecasted loans + required reserves

William Chittenden edited and updated the PowerPoint slides for this edition.

MANAGEMENT:

STRATEGIES & POLICIES

Chapter 9

Key topics

the time needed at a reasonable cost

affect the liquidity position of the bank

 Examples:

 Deposits and withdrawals;

 Loan disbursements and loan payments

Supplies of liquid funds

Demands for liquidity

A financial firm’s net liquidity position

L = Supplies of liquid funds

- Demands for liquidity

 immediate liquidity (CD due to mature, deposit

withdrawn tomorrow)

 longer-term liquidity (arising from seasonal,

cyclical & trend factor)

→ manager must plan how, when & where liquid

fund can be raised

Quick quiz: Comprehensive problem

Suppose that a bank faces the following cash inflows and outflows during

the coming week:

1 deposit withdrawals are expected to total $33 million ;

2 customer loan repayments are expected to amount to $ 108 million ;

3 Operating expenses demanding cash payment will probably approach

$51 million ;

4 Acceptable new loan requests should reach $294 million ;

5 Sales of bank assets are projected to be $ 18 million ;

6 New deposits should total $ 670 million ;

7 Borrowings from the money market are expected to be about $ 43mil ;

8 Non-deposit service fees should amount to $ 27 million ;

9 Previous bank borrowings totaling $ 23mil are scheduled to be repaid; &

10 A dividend payment to bank stockholders of $140 million is scheduled.

What is this bank’s projected net liquidity position for the coming week?

L = Supplies of liquid funds

- Demands for liquidity

Essence of liquidity management

supply of liquidity at any particular moment The

financial firm must continually deal with either a

liquidity deficit or surplus

readiness to meet demands for liquidity, the

lower is the financial firm’s expected profitability

 High liquidity → high opportunity cost

 Low liquidity → high interest cost & transaction cost

significant liquidity problems?

and liabilities

deposits and money market borrowings) subject to immediate repayment

Strategies for liquidity managers

• Strategies include:

Asset liquidity management

 This strategy calls for storing liquidity in the form

etc.) and selling them when liquidity is needed

 Mainly used by small financial institutions, finding that reliance on borrowing is a risky approach

Liquid asset characteristics

converted to cash quickly

original investment with little risk of loss

Options for storing liquidity

Asset liquidity management is not costless and include opportunity cost:

must be sold

Borrowed liquidity (liability) management

borrow from the money market to cover all of its

liquidity needs

 Applied by large financial institutions

Sources of borrowed funds

1 Federal funds purchased

2 Selling securities for repurchase (Repos)

3 Issuing large CDs (> $100,000)

4 Issuing Euro-currency deposits

5 Securing advance from the Federal Home Loan

Bank (FHLB)

6 Borrowing reserves from the discount window of the

Federal Reserve

Borrowed liquidity (liability) management strategy

 Borrow only when there

is a need for funds

 Volume and composition

of the investment portfolio

can remain unchanged

 The institution can control

interest rates in order to

borrow funds (raise offer

rates when needs

 Borrowing needs can be interpreted as a signal of financial difficulties

Balanced liquidity management strategy

 Some expected demand for liquidity is stored in assets

 Some liquidity needs are backed by arranged credit line

from potential fund suppliers

 Unexpected cash needs are met by near-term borrowings

 Longer-term liquidity needs are planned and parked in

short-& medium-term assets

Guidelines for liquidity managers

 They should keep track of all using and

fund-raising departments

biggest credit or deposit customers

 Their priorities and objectives for liquidity

management should be clear

 Liquidity needs must be evaluated on a continuing

basis

Methods for estimating liquidity needs

Key steps….

liquidity planning period

be calculated for the same planning period

liquid funds by comparing the estimated change in loans to the estimated change in deposits.

Simpler approach….

Forecast of future deposit and loan growth is divided

into 3 components:

1 Trend component : a trend with constant growth is

estimated based on data in a long period

2 Seasonal component : changes in deposit or loan

due to seasonal factors

3 Cyclical component : deviation from the bank’s

expected deposits & loans depending on strength

or weakness of the economy in the current year.

Forecasts of trend, seasonal, and cyclical components of deposits and loans

Cash and due from banks $ 160 Transaction accounts and nonnegotiable deposits $1,600 Loans 1,400 Certificates of deposit and other borrowing 280 Investment securities 400 Stockholders' equity 120

Average growth of deposits over 10-year-period: 12% annually or 0,95% monthly

Average growth of loans over 10-year-period: 9% annually or 0,72% monthly

Reference balance sheet:

Deposit forecast

components of deposits and loans

Loan forecast

 The bank’s monthly liquidity needs are

estimated as the forecasted change in loans plus required reserves minus the forecast

change in deposits:

Forecasted loans + required reserves - forecasted deposits

Estimates of liquidity needs

More simpler approach: Liquidity GAP measures

projected changes in purchased funds and

investments with specific loan and deposit flows.

 The bank can calculate a liquidity GAP by classifying potential uses and sources of funds into separate

time frames according to their cash flow

characteristics.

 The Liquidity GAP for each time interval equals the dollar value of uses of funds minus the dollar value of sources of funds.

0–30 Days 31–90 Days 91–365 Days

Potential Uses of Funds

Add: Maturing time deposits

Plus: Forecast new loans

Minus: Forecast net change in transactional accounts

Potential Sources of Funds

Add: Maturing investments

Structure of funds approach

divided into categories For example:

‘Hot money’ liabilities (volatile liabilities)

 Vulnerable funds

 Stable funds (core deposits or core liabilities)

according to some operating rule

Liability liquidity reserve =

Legal reserves held)

+ 0.30 x (Vulnerable deposit & non-deposit funds – Legal reserves held)

+ 0.15 x (Stable deposit & non-deposit funds –

Legal reserves held)

Note: 0.95, 0.30, 0.15: common rule of thumb

Structure of funds approach

Total liquidity requirement

= Deposit & non-deposit liability liquidity

requirement and Loan liquidity requirement

= 0.95 x (Hot money funds – Legal reserves held behind hot money deposits)

+ 0.30 x (Vulnerable deposit & non-deposit funds – Required legal reserves)

+ 0.15 x (Stable deposit & non-deposit funds –

Required legal reserves)

+ 1.00 x (Potential loans outstanding – Actual loans outstanding)

(based on experience and industry averages)

1 Cash position indicator

2 Liquid security indicator

3 Net Fed funds position

4 Hot money ratio

5 Core deposit ratio

The higher ratio → the more liquid

6 Capacity ratio

7 Pledged securities ratio

8 Deposit brokerage index

9 Deposit composition ratio

10 Loan commitment ratio

The higher ratio → the less liquid

The ultimate standard: market signals

of liquidity management

Legal reserves

 Assets that a central bank requires depository

institutions to hold as a reserve behind their deposits

or other liabilities

 Only 2 kinds of assets can be used for this purpose:

1) cash in the vault;

2) deposits held in a reserve account with the regional Fed

 Banks hold deposits at the Federal Reserve

because:

 The Federal Reserve imposes legal reserve

requirements and deposit balances qualify as legal reserves

 To help process deposit inflows and outflows

caused by check clearings, maturing time deposits and securities, wire transfers, and other

transactions

 Required reserves and Monetary policy

 The purpose of required reserves is to enable the Federal Reserve to control the nation’s money

supply

 The Fed has three distinct monetary policy tools:

 Open market operations

 Changes in the discount rate

 Changes in the required reserve ratio

 Required reserves and Monetary policy

affect the amount of legal required reserves and thus change the amount of money a bank can lend out

 Required reserves and Monetary policy

 For example, a required reserve ratio of 10%

means that a bank with $100 in demand deposits outstanding must hold $10 in legal required

reserves in support of the DDAs

 The bank can thus lend out only 90% of its DDAs

 If the bank has exactly $10 in legal reserves, the reserves do not provide the bank with liquidity

 If the bank has $12 in legal reserves, $2 is excess reserves, providing the bank with $2 in immediately available funds

Reserve balances at the Federal Reserve Bank

Sweep account…

declined in recent years largely due to sweep

accounts

that permits the bank to move funds out of a

customer’s checking account overnight in order to

generate higher returns for the customer and lower reserve requirements for the bank

 Retail sweep : involving checking & saving accounts

of individual & families

 Business sweep : involving commercial checking

deposits

 Impact of Sweep accounts on required reserve balances

of 10% on demand deposits, ATS, NOW, and

other checkable deposit (OCD) accounts

and have a zero required reserve requirement

ratio.

depository institutions to shift funds from OCDs, which are reservable, to MMDAs or other

accounts, which are not reservable

Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04

Monthly Averages of Initial Amounts Cumulative Total

 Sweep accounts: 2 types

 Reclassifies transaction deposits as savings deposits at the close of business on Friday and back to transaction accounts at the open

on Monday

 On average, this means that for three days each week, the bank does not need to hold reserves against those balances

 Sweep accounts: 2 types

 The bank’s computer moves the customer’s DDA balance into an MMDA when the dollar amount reaches some minimum and returns funds as needed

 The number of transfers is limited to 6 per month, so the full amount of funds must be moved back into the DDA on the sixth transfer

of the month

 Required reserves can be met over a two-week period

 The dollar magnitude of base liabilities

 The required reserve fraction

 The dollar magnitude of qualifying cash assets

Meeting legal reserve requirements

 Historically, reserve requirements varied with the type of bank charter and each bank’s geographic location

 Currently, banks use a lagged reserve account (LRA) system

 Reserves are held for a two-week period against deposit liabilities held for the two-week period ending almost three weeks earlier

 Lagged reserve accounting

 Computation Period

 Consists of two one-week reporting periods beginning on a Tuesday and ending on the second Monday thereafter

 Maintenance Period

 Consists of 14 consecutive days beginning on a Thursday and ending on the second Wednesday thereafter

Meeting Legal Reserve Requirements

 The balance to be maintained in any given maintenance period is measured by:

 Reserve requirements on the reservable liabilities calculated as of the computation period that ended

17 days prior to the start of the maintenance period

 Less vault cash as of the same computation period

 Lagged reserve accounting

 Both vault cash and Federal Reserve Deposits qualify as reserves

 The portion that is not met by vault cash is

called the reserve balance requirement

U.S legal reserve requirements

 In 2007-2008, first $9.3mil have 0 legal reserves

 3% of end-of-the-day daily average for a two week

period for transaction accounts up to $43.9mil ($43.9mil

is known as the reserve tranche and changes every

year)

 10% of end-of-the-day daily average for a two week

period for transaction accounts for amounts over

$43.9mil

 Transaction accounts include checking accounts, NOW

accounts and other deposits used to make payments

 The $43.9mil amount is adjusted annually

 The money position manager oversees the institution’s

legal reserve account

Depository Institutions

Type of Deposit Percentage

Effective Date

of Applicable Percentages Net transactions accounts

Exempt amt $ 7.0 mill 0.0% 12/23/2004

Up to $ 47.6 mill 3.0% 12/23/2004 Over $ 47.6 mill 10.0% 12/23/2004 All other liabilities 0.0% 12/27/1990

Calculating required reserves

Any deficit above 4% may be assessed an interest penalty equal to the

Federal Reserve’s discount (primary credit) rate at the beginning of the month

plus 2 percentage points applied to the amount of the deficiency

Repeated reserve deficits lead to increased regulatory scrutiny, possibly

damaging its efficiency.

reserve accounting

8-Aug 9-Aug 10-Aug 11-Aug 12-Aug 13-Aug 14-Aug

15-Aug 16-Aug 17-Aug 18-Aug 19-Aug 20-Aug 21-Aug

22-Aug 23-Aug 24-Aug 25-Aug 26-Aug 27-Aug 28-Aug

29-Aug 30-Aug 31-Aug 1-Sep 2-Sep 3-Sep 4-Sep

5-Sep 6-Sep 7-Sep 8-Sep 9-Sep 10-Sep 11-Sep

12-Sep 13-Sep 14-Sep 15-Sep 16-Sep 17-Sep 18-Sep

19-Sep 20-Sep 21-Sep 22-Sep 23-Sep 24-Sep 25-Sep

Lagged reserve computation period and vault cash application period

Reserve maintenance period

Report of reversible liabilities and

offsetting asset balances

Balances at Close of Business Day (millions of dollars) Lagged Computation Tue Wed Thu Fri Sat Sun Mon Tue Wed Thu Fri Sat Sun Mon

Period 10-Aug 11-Aug 12-Aug 13-Aug 14-Aug 15-Aug 16-Aug 17-Aug 18-Aug 19-Aug 20-Aug 21-Aug 22-Aug 23-Aug

Two- Week Total

Daily Average DDAs 992 995 956 954 954 954 989 996 960 959 958 958 958 990 $ 13,573 $ 969.50 Auto trans from savings 0 0 0 0 0 0 0 0 0 0 0 0 0 0 $ 0.0 $ 0.0 NOW and Super NOW 221 221 222 223 223 223 223 224 225 225 225 225 225 225 $ 3,130 $ 223.57

DD bal from U.S dep 163 281 190 186 186 186 159 159 274 178 182 182 182 164 $ 2,672 $ 190.86 CIPC 96 96 78 78 78 78 95 98 92 79 81 81 81 88 $ 1,199 $ 85.64 Net trans accounts 954 839 910 913 913 913 958 963 819 927 920 920 920 963 $ 12,832 $ 916.57

Vault Cash 28 30 31 33 33 33 38 30 31 32 32 32 32 36 $ 451 $ 32.21

Reservable Liabilities for

Net trans accounts

(0.04 x 88.115) + 58.177

(0.04 x 88.115) + 54.401

Factors influencing the money position

Other factors to influence legal reserves

 The cheapest source

 But very volatile

 Managers rely on the Fed funds target rate (the

most volatile on the settlement date)

 Sell liquid securities

 Draw upon excess correspondent balances

 Enter into repurchase agreements for temporary

borrowings

 Sell new time deposits

 And borrow in the Eurocurrency market