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14 Cards in this Set
- Front
- Back
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Supplies of Liquidity flowing into the firm (5)
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Incoming Deposits
Revenue from Sale of nondeposit services customer loan repayment sale of assets money market borrowings |
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Demands on the financial firm for liquidity (5)
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Deposit withdrawls
volume of acceptable new loan requests repayment of previous bank borrowings other operating expenses dividend payment to stockholders |
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Essence of liquidity management problems for financial institutions (2)
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1.it is rate that demands for liquidity are equal to the supply of liquidity at any moment in time. either deficit or surplus.
2. trade off between profitability and and liquidity : more money and effort tied up with liquidity problems, more money that is not being made profitable. |
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Costs related to resolving liquidity problems (3)
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1. interest cost on borrowed funds
2. transaction costs and time n money finding funds 3. oppourtunity costs of future inflows due to the sale of assets or tying up money that could be invested |
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Reasons F.I's face significant Liquidity problems
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1. imbalance between the maturity dates on their assets and those of the liabilities.
2. unusually high proportion of liabilities subject to immediate payment 3. sensitivity to changes in market interest rates (customers withdraw to hunt down higher rates, postpone new loans requests, and the value of outstanding assets which they need to sell) 4. failure kills customer confidence |
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3 Major strategies for dealing with liquidity problems
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1. Asset Liquidity Management (asset conversion)
2. Liability Management 3. Balanced Liquidity management |
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3 characteristics of Liquid Assets
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1.the asset has a READY MARKET so it can be converted into cash without delay
2. It has a reasonably STABLE PRICE to that no matter how quickly the asset must be sold or how large the sale is, the market is deep enough to absorb the sale without a significant decline in price 3. it is REVERSIBLE...the seller can recover his original investment(principal) with little loss of risk. |
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Most Popular Liquid Assets
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-T-Bills
-federal funds loans -cds -muni's -federal agency securities -euro-currency loans |
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What makes a financial firm liquid?
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If it has access , at reasonable cost, to liquid funds in exactly the amounts required at precisely the time they are needed
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Who is the asset conversion strategy mainly used by?
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smaller financial institutions that find it a less risky approach to liquidity management than relying on borrowings.
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Costs of Asset Conversion Strategy
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1. opportunity costs from when the assets must be sold....loss of future earnings they would have generated.
2. Transaction costs to brokers from the sales 3. loss of value because assets need to be sold when markets are down 4. weakens the appearance of the balance sheet 5. forgoing higher returns because you have low-earning liquid assets |
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Borrowed/Purchased liquidity (liability) strategy
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Borrowing immediately spendable funds to cover all anticipated demands for liquidity
Raising more of the liquid funds through borrowings in money markets |
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Advantages to Borrowed liquidity strategy
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1. ability to choose to borrow only when it actually needs funds, so assets don't need to be tied up in lower-earning instruments which hurt potential returns.
2. You can leave the volume and composition of its asset portfolio unchanged if you are satisfied. 3. It comes with its own control lever...the interest rate offered to borrow funds. it they need more funds, they just raise the offer rate until the funds flow in. if funds aren't needed, lower rates can be paid. |
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Principle sources of borrowed liquidity
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Jumbo Cds
federal funds borrowing repos eurocurrency borrowings advances from Federal Home Loan banks borrowings at the discount window of the central bank |
