Different Types of Funds & Liquidity Management Strategies in Banking

1. Bank Funds
&
Liquidity Management

2. TeamMembers
Name Id No
Himel Rafsun 3-20-44-004
Md. Mehedi Al Hasan Rakib 3-20-44-014
Farhan Fuad Hasan 3-20-44-057

3. BankFunds

4. Conceptof Fund
According to cash concept, the word fund is synonymous with cash
According to total resources concept, the term funds represent total
assets or total resources of the organization
According to working capital concept the term funds refer to net
working capital

5. Sourcesof Funds
Owned Funds: Bank’s own paid up capital, Reserve Fund, Profit
Borrowed Funds: Borrowing from central bank, Deposits, Other
sources

6. FundManagement
Fund Management means the efficient and effective management of
funds (money) in such a manner as to accomplish the objectives of the
organization i.e. to ensure an adequate level of liquidity and to earn
highest possible profit.

7. TheUsesof BankFunds
Reserves and Defensive Assets: The bank holds defensive assets beyond
its reserve requirements only to the extent that their yield is competitive
with the marginal revenue from lending and other investments
Loans and Investments: These are primary ways through which banks
make money. Loans are banks’ risk assets. Investment securities could be
classified according to type of claim (debt vs equity), listing (listed vs
unlisted), issuer (private vs government) and maturity.

8. RegulatoryInitiative forFundsManagement
Under the new provisions, the banks will have to submit their statements on WB and
commitments to the Bangladesh Bank on fortnight and monthly basis. The first and
second statements on WB have to be provided to the Department of Offsite
Supervision (DOS) of the central bank in three working days after end of each
fortnight to update the regulator on their financial health. On the other hand, the
statement on commitments has to be submitted to the DOS of the BB by the fifth day
of the following month, according to a circular issued by the Bangladesh Bank on
Tuesday, in the wake of a plethora of not-so-healthy developments in the banking
circles.

9. LiquidityManagement

10. BanksLiquidity
Liquidity refers to the ability of a bank to ensure the availability of
funds to meet financial commitments or maturing obligations at a
reasonable price at all times

11. Sourcesof Liquidity
The primary reserves are made of vault cash, cash balances or excess
reserves with the central bank, as well as deposits with other banks, both
locally and abroad. They are maintained to satisfy legal and operational
requirements.
While the secondary reserves are those liquid assets that can be converted
into cash without impairment of the principal sum invested. Secondary
reserves are characterized by short maturity, high credit quality and high
marketability.

12. Typesof Liquidity
Immediate liquidity: When cash money is needed to pay in cheques to
demandable customers, it is called immediate liquidity.
Short-term liquidity: Short-term liquidity is used to meet the monthly liquidity
requirements. Based on the types of clients and on the seasonal variability, the
necessity of these types of liquidity can vary.
Long-term liquidity: Long-term liquidity is required to meet the cash demand for
replacement of fixed assets, retirement of the redeemable preferred shares or
debentures and to acquire new fixed assets and technical know-how.

13. Typesof Liquidity
 Contingent liquidity: It arises depending on the happening of some unexpected events. It is difficult to guess
this unexpected situation but not impossible though the amount cannot be exactly predicted. Contingent
liquidity is also required to face the adverse situations created by big bank robbery, fraud, arson or other
accidents.
 Economic cyclical liquidity: Based on good or bad economic situation, the supply of bank deposit and the
demand for loan varies. Due to this variation, the liquidity demand also varies. But it is very difficult to
identify the extent of such variation. Generally, difficult national and international events such as political
instability, war, the pressure created by the different interest groups relating to the banking activities are the
causes of economic cyclical liquidity needs.

14. Needfor Liquidity
 Adequate liquidity is also needed to avoid forced sale of asset at unfavorable market conditions and at heavy
loss.
 Adequate liquidity serves as vehicle for profitable operations especially to sustain confidence of depositors in
meeting short run obligations.
 Finally, adequate liquidity guides against involuntary or non-voluntary borrowing from the regulatory
authorities where there is a serious liquidity crisis, the bank is placed at the mercy of the Central Bank, and
hence the control of its destiny may be handed over.
 Having adequate or sufficient liquidity to meet all commitments at all times at normal market rates of interest
is indispensable for both large and small banks. Liquidity is the life blood of a banking setup.

15. LiquidAssetsof a Bank
Cash in hand
Items in the process of collection
Reserve in Bangladesh Bank
Balance with other banks

16. LiquidityCrisis
Liquidity crisis means negative financial situation of the banks or lack
of cash flow of the banks. Liquidity crisis arises when a bank does not
have enough liquid assets (i.e. cash or easily cash convertible assets) at
hand for meeting its urgent short-term financial obligations such as
repaying deposit amount, repaying loan amount, paying bills and paying
stakeholders. A bank is announced bankrupt when it is not able to solve
the problem of liquidity.

17. LiquidityManagement
liquidity management as a concept encompasses efficient and effective
planning and organization of Bank’s assets which will enhance its
liquidity and profitability at a minimum cost possible

18. Principlesof LiquidityManagement
Banks must develop a structure for liquidity management
Banks must measure and monitor net funding requirements
Banks should manage market access
Banks should have contingency plans
Banks should manage their foreign currency Liabilities

19. Principlesof LiquidityManagement
Each bank must have an adequate system for internal controls over its
liquidity risk management process. A fundamental component of the
internal control system involves regular independent reviews and
evaluations of the effectiveness or enhancements to internal controls are
made.
Each bank should have in place a mechanism for ensuring that there is an
adequate level of disclosure of information about the bank in order to
manage public perception of the organization and its soundness.

20. LiquidityRisk
Liquidity risk arises from either the bank's inability to meet its obligations as they
fall due or to fund increases in assets without incurring unacceptable cost or losses
Funding liquidity risk: the risk that a firm will be unable to meet its current and
future cash flow and collateral needs without affecting its daily operations or its
financial condition.
Market liquidity risk: the risk that a firm cannot easily offset or sell a position
without incurring a loss because of inadequate depth in the market.

21. LiquidityRiskStrategy
Composition of assets and liabilities
Diversification and stability of liabilities
Managing liquidity in different currencies
Dealing with liquidity disruptions

22. LiquidityManagementandPerformance
The issue of liquidity though important to other businesses, is most paramount to
banking institutions and this explains why bank show-case cash and other liquid
securities in their balance sheet statement. Thus bank ensures that sufficient
provision of cash and other near cash securities are made available to meet
withdrawals obligation and new loan demand by customers in need of liquidity.
Hence, banks in Bangladesh are statutorily required to comply with cash reserve
requirement (CRR) and Statutory Liquidity Ratio (SLR) of the Central Bank of
Bangladesh as a measure of effectively managing the liquidity position of banks.

23. Conclusions
Management of Fund & Liquidity is vital for the sustainability of any
bank, because illiquidity can have striking and hostile impacts even on
solvent banks. For assessing liquidity demands, bank’s administrations
need to determine both the liquidity conditions of banks and the
financing necessities that are required under emergency

24. Recommendations
Short term investment should be balanced with short term funds and long term investment should
be balanced with long term funds
Banks need to ensure the precise supervision on deposit and advance position which helps to
manage the liquidity position with very well manner.
Commercial banks need to be careful while giving loans and also need to reduce NPLs to increase
profitability
Every bank should have an up-to-date contingency funding plan
An effective management information system (MIS) is essential for sound liquidity management
decisions