Characterization techniques for liquidity management

The strategy of transformation of the assets is estimated as less risky than others, but it is also quite expensive in terms of cost. Selling assets is accompanied by certain costs (commissions, brokerage, stock exchange fees, etc.), but also leads to deterioration of the balance, as low-risk assets are sold. In addition, the bank loses future revenue that could be generated by such assets. Sometimes the bank is forced to sell assets at lower market prices, if there is a pressing need for cash. Support for large, the stock of liquid assets generally reduces the rate of return of the bank. Consequently, we can define the following disadvantages of the method: the loss of future income that could be obtained by the assets sold, cost of payments for transactions (commissions) paid to brokers for securities transactions, the deterioration of the balance sheet as assets sold with low-risk, and their presence indicates the financial soundness of the bank, the need for asset sales at lower prices in the market, putting the bank at risk of significant loss of income and capital preservation funds in liquid form reduces the rate of return of all assets. Advocates of the theory of management liability claim that the banks can solve the problem of liquidity by attracting additional funds from the market. This theory suggests the involvement of liquidity in the money market in amounts sufficient to cover all the expected demand for liquid assets. Credits are used only when a bank has a real need for liquidity, avoiding too much highly liquid assets that do not make profits. Category: Management Operations Commercial Bank