Describe the objectives involved in the management of a bank\'s overall liquidit

Question

Describe the objectives involved in the management of a bank's overall liquidity position and the costs to the bank of poor liquidity management. In your discussion, identify the major sources of demand on a bank's liquidity position, including reserve requirements, and the major sources of funds to meet liquidity needs. As part of your discussion, consider how the predictable fluctuations in loan demand and deposit flows can cause changing liquidity needs and how a bank might anticipate such changes.

Explanation / Answer

If banks do not follow the required cash reserve requirement rule, Then banks can go bad anytime, There are instances in past where banks have already lend most of its reserves and when customer enmasse demand back their money banks are in no position to pay back.

This above problem can sometimes be avoided by having inter-bank lending which can take care of immediate cash needs for the banks, but this too can fail sometimes. The very good example was from the recent financial crisis, Banks with huge revenues were not able to meet cash withdraws that people demand, As a result some of them had projected a very poor image.

Banks at anytime must keep the required reserve ratios of immediate cash requirements. Then such problems wont arrive.

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