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PROBLEM

Consider the balance sheet of MAZK Investments Bank listed below:

MAZK INVESTMENTS BANK

Balance Sheet
As of March 31, 2021
In millions of pesos
ASSETS LIABILITIES AND EQUITY
Cash 10 Deposits 68
Loans 50 Equity 7
Securities 15
Total 75 Total

What if its preferred client decides to exercise a 15 million loan commitment,

show the new structure of the balance sheet if MAZK uses:

a. Asset management (STORED LIQUIDITY MANAGEMENT) with the following

conditions:
 Assuming that the BSP restricts the investment bank to have an
operating cash balance of 50 percent of the current cash balance,
 That the bank has to consider the order of priority in disposing the
other assets in order to exercise its commitment.
 Only 20% of the bank loans assets can be discounted at 50%
 Securities can be disposed at 80% less of the original value.

ASSETS LIABILITIES AND EQUITY

Cash 8 Deposits 53
Loans 40 Equity 7
Securities 12
Total 60 Total 60
 b. Liability management (PURCHASED LIQUIDITY MANAGEMENT

ASSETS LIABILITIES AND EQUITY

Cash 5 Deposits 53
Loans 40 Equity 7
Securities 12
Total 60 Total 60

c. Show your solutions and interpret the results.

In the asset management (store liquidity management), the FI satisfies this

requirement by using surplus cash deposited in its vaults or kept on account at
other FI’s, since the client debt is $15 million in deposits. The FI's balance sheet
would improve if the $15 million drop in bank liabilities were offset by a $15
million reduction in cash reserves.
On the liability management (purchased liquidity management). The FI to keep
its overall balance sheet value of $75 million without affecting the size and
structure of the asset side balance sheet—that is, the deposit drain is fully
adjusted on the liability side of the balance sheet. To put it another way, bought
liquidity control will protect the asset side of the balance sheet from regular
liability-side drains. A financial institution may deal with a deposit drain in one of
two ways: (1) acquired liquidity management or (2) stored liquidity management.

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