Question
Distinguish clearly between stored and purchased liquidity strategies. Evaluate the effects of each on a bank's balance sheet for a liquidity need arising from a
Distinguish clearly between stored and purchased liquidity strategies. Evaluate the effects of each on a bank's balance sheet for a liquidity need arising from a drain from a large portfolio of CD's not being renewed (a bank liability). How does bank size influence the liquidity strategies undertaken?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Stored liquidity and purchased liquidity are two distinct liquidity management strategies that banks use to handle liquidity needs Stored liquidity involves holding liquid assets or reserves within the banks balance sheet to address potential liquidity demands without depending on external sources These assets can include cash shortterm securities or other highly liquid assets On the other hand purchased liquidity involves acquiring funds from external markets or entities to meet immediate liquidity requirements when the internal reserves are not sufficient This can take the form of borrowing from other financial institutions using lines of credit or issuing debt securities In the scenario where there is a drain from a large portfolio of CDs Certificate of Deposits not being renewed it represents a liability for the bank as these deposits have matured and need to be repaid or rolled over Heres how each liquidity strategy would affect a banks balance sheet in response to this liquidity need Effects of Stored Liquidity Strategy If the bank has stored liquidity in ...
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started
Financial and Managerial Accounting the basis for business decisions
Authors: Jan Williams, Susan Haka, Mark Bettner, Joseph Carcello
17th edition
007802577X, 978-0078025778
