Banking Chap 11 Liquidity And Reserves Management: Strategies And Policies

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liquidity

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access to sufficient immediately spendable funds at reasonable cost exactly when those funds are needed

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net liquidity position

Back 2

difference between volume of liquid funds available and the demand for liquid funds

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asset conversion

Back 3

strategy for meeting liquidity needs in which liquid reserves are stored in readily marketable assets that can be quickly converted into cash

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liquid asset

Back 4

any asset that meets three conditions:

1) Price stability

2) ready marketability

3) reversibility

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opportunity cost

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forgone income that is not earned because idle funds have not been invested in earning assets; also, the yield available on the next best alternative use of an individual's or institution's funds

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liability management

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use of borrowed funds to meet liquidity needs, in which a financial institution attracts the volume of liquidity it needs by raising or lowering the rate of interest it is willing to pay on borrowed funds

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balanced liquidity management

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combined use of both asset management and liability management to cover liquidity needs

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sources and uses of funds method

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approach developed for estimating liquidity requirements that examines the expected sources of liquidity (for a bank, principally its deposits) and the expected use of liquidity (principally its loans) and estimates the net difference between funds uses and sources over a given period of time in order to aid in liquidity planning

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liquidity gap

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amount by which the sources and uses of liquidity do not match

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structure of funds method

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method of estimating liquidity that depends on a detailed analysis of deposit and loan customers and how the levels of their deposits and loans are likely to change over time

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liquidity indicators

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certain bellwether financial ratios (e.g., total loans outstanding divided by total assets) that are used to estimate liquidity needs and to monitor changes in liquidity position

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money position manager

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managerial position that is responsible for ensuring that the institution maintains an adequate level of legal reserves to meet its reverse requirements as set by law and also has access to sufficient quantities or reserves to accommodate customer demand and meet other cash needs

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legal reserves

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assets that by law must be held behind deposits or other designated liabilities; in the US, these assets consist of vault cash and deposits at the Fed banks

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lagged reserve accounting (LRA)

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accounting system begun by the Fed in 1984 for calculating each depository institution's legal reserve requirement, in which the reserve computation and reserve maintenance periods for transactional deposits are not exactly the same

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reserve computation period

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period of time established by the Fed for certain depository institutions over which the daily average amounts of various deposits are computed to determine each institution's legal reserve requirements

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reserve maintenance period

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according to federal law and regulation, a period of time spanning two weeks, during which a depository institution must hold the daily average amount of legal reserves it is required by law to hold behind its deposits and other reversible liablilities

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clearing balances

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deposits held with the Fed banks by depository institutions to help clear checks for payment and collection and that allow the depository institutions using Fed services to earn interest credits on these balances in order to help offset the cost of the Fed services

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sweep accounts

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contracts executed between a dep. inst. and some of its deposit customers that allow the institution to transfer funds (usually overnight) out of the customer's checking account into their savings deposits or into other types of deposits that do not carry legal reserve requirements

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federal funds market

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domestic source of reserves in which a dep. inst. can borrow the excess reserves held by other institutions ; also known as same-day money because these funds can be transferred instantaneously by wire from the lending inst. to the borrowing inst.

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hot money

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capital that is frequently transferred between financial institutions in an attempt to maximize interest or capital gain.

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bump-up CDs

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A savings certificate entitling the bearer to take advantage of rising interest rates with a one time option to increase the interest rate paid.

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Step-up CDs

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there are guaranteed interst rate increases which the buyer doesn’t have to be concerned about watching, but automatically kick in a specific intervals of the term of ownership.

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liquid CDs

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A certificate of deposit (CD) that allows withdrawls to be made, without penalty, from the account. The major upside to this type of CD is that your money is accessible to you if you need it throughout the term.

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IPC deposits (Indivs, Partnerships, Corps)

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75% of all deposits

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TT&L Accounts

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(Treasury Tax & Loan)

Treasury accounts created at commercial banks to accept electronic tax payments and to disburse Treasury funds. This is an alternative to the direct deposit of tax payments into Treasuryaccounts with Federal Reserve banks.

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Correspondent Accounts

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account (often called a nostro or vostro account) established by a banking institution to receive deposits from, make payments on behalf of, or handle other financial transactions for another financial institution.

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Annual Percentage Yield (APY)

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a normalized representation of aninterest rate, based on a compounding period of one year. Its figures allow for a reasonable, single-point comparison of different offerings with varying compounding schedules.