Briefly explain the importance of liquidity management

Reference no: EM132952221

Question

The pandemic of Covid-19 has brought the whole economy into vulnerable business environment. As a Risk Manager of Bank A, you and your team are responsible for taking a comprehensive analysis about financial markets and economy, to forecast the movement of the interest rates, measure the Bank's risk exposures in some scenarios and propose strategies to manage the liquidity as well as the interest rate risks for the Bank.

The following table shows you financial statement of the Bank A for current year:

Part 3. Liquidity Management

1. Analyze the Bank's liquidity management:

(i) Briefly explain the importance of liquidity management to a bank in general? (From 100- 150 words)

(ii) Does the Bank A meet the Central Bank reserve requirement?

(iii) Are there any excess reserves and what is the benefit to the Bank of holding such excess reserves?

(iv) What is the maximum deposit outflow that the Bank can sustain without altering its balance sheet?

(v) Liquidity management team recommends that the Bank should increase total reserve as much as possible to serve any deposit outflows. What do you think about this proposal -Pros and cons? (From 100-150 words)

2. Scenario analyses:

(i) If there is a total withdrawal of 1,000 trillion VND from deposits at the Bank, would this bank still comply with the Central Bank´s reserve requirement? Should there be any shortage in required reserves, what are possible measures that the bank can do to recover in general?

(ii) In the case (i) above, what would be the cost in a month for the Bank if it decides to borrow from another bank to comply with the Central Bank´s required reserve regulation?

Reference no: EM132952221

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