Practical considerations for effective liquidity management in financial institutions
Effective liquidity management is vital for financial institutions to ensure stability and profitability, especially during market stress. This guide offers practical strategies to maintain robust liquidity buffers and optimize funding sources, helping institutions navigate financial uncertainties and enhance resilience.
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Institutions must balance the cost of maintaining liquidity reserves against profitability. Liquidity management involves various stakeholders with differing views on funding costs and risk tolerance. A transparent view of liquidity includes on-balance-sheet and off-balance-sheet commitments, considering potential impacts from customer actions. Long-term assets should be funded with liabilities of similar maturities to reduce rollover risks and ensure profitability. Liquidity buffers include cash holdings, government bonds, and lines of credit, providing backup during institution-specific events. Institutions need plans for seeking central bank funding during crises, outlining mechanisms and procedures. A robust transfer pricing framework allocates internal funding based on risk, mimicking market costs and preventing distorted incentives.
