Chapter

Liquidity Management and Assets-Liabilities Strategy

Hrishikes Bhattacharya

in Banking Strategy, Credit Appraisal, and Lending Decisions

Second edition

Published in print October 2011 | ISBN: 9780198074106
Published online September 2012 | e-ISBN: 9780199080861 | DOI: http://dx.doi.org/10.1093/acprof:oso/9780198074106.003.0002
Liquidity Management and Assets-Liabilities Strategy

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This chapter discusses liquidity management theories such as the commercial loan theory, shiftable theory, and anticipated income theory. It assesses the reasons for most liquidity problems of banks, highlights the need for liquidity planning, and presents a liquidity model for banks. It shows that liquidity management in a bank is closely linked with its assets-liabilities strategy. A fully matched position is ideal — a self-liquidating balance sheet — but this is not observable in real life, because of the conflicting objectives of a bank and its borrowers, nor is it desirable due to its negative impact on profitability; a reasonable level of mismatch enhances profitability.

Keywords: liquidity management theories; liquidity planning; liquidity ratios; pool of funds strategy; asset allocation strategy; maturity matching strategy; self-liquidating balance sheet; asset-liabilities strategy

Chapter.  15231 words.  Illustrated.

Subjects: Financial Markets

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