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Liquidity and Reserve Management
Liquidity and Reserve Management
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Key Topics
Sources of Demand for and Supply of
Liquidity
Why Financial Firms Have Liquidity Problems
Liquidity Management Strategies
Estimating Liquidity Needs
The Impact of Market Discipline
Legal Reserves and Money Management
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Introduction
One of the most important tasks the management of any financial
institution faces is ensuring adequate liquidity at all times
A financial firm is considered to be liquid if it has ready access to
immediately spendable funds at reasonable cost at precisely the
time those funds are needed
This suggests that a liquid financial firm either has
The right amount of immediately spendable funds on hand when they are
required
They can raise liquid funds in timely fashion by borrowing or selling assets
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Bank Management and Financial
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Bank Management and Financial
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Bank Management and Financial
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Public confidence
Stock price behavior
Risk premiums on CDs and other borrowings
Loss sales of assets
Meeting commitments to credit customers
Borrowings from the central bank
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The reserve requirement in 2010 was 3 percent of the end-of-theday daily average amount held over a two-week period, from $10.7
million up to $58.8 million
. The first $10.7 million have zero legal reserves
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Assuming a 360-day year for ease of computation, this bank could apply
up to $2,138.89 to offset any fees charged to the bank for its use of
Federal Reserve services
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Other Options
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EXHIBIT 112 Movements in the Effective Federal Funds Rate, Its Target
(the Intended Federal Funds) Rate, and the Discount (Primary Credit) Rate
for Depository Institutions Seeking Credit from the Federal Reserve Banks
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Quick Quiz
What are the principal sources of liquidity demand for a financial firm?
What are the principal sources from which the supply of liquidity comes?
Why do financial firms face significant liquidity management problems?
What are the principal differences among asset liquidity management,
liability management, and balanced liquidity management?
How does the sources and uses of funds approach help a manager estimate
a financial institutions need for liquidity?
How can the discipline of the marketplace be used as a guide for making
liquidity management decisions?
What are sweep accounts? Why have they led to a significant decline in
the total legal reserves held at the Federal Reserve banks by depository
institutions operating in the United States?
What impact has recent financial reform legislation had on raising shortterm cash?
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