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INTRODUCTION
The quick ratio will allow determining if we can pay your short-term
debt obligations, or current liabilities, without having to sell any
inventory. It's important for a firm to be able to do this because, if we
sell have to sell inventory to pay bills that means we have to find a
buyer for that inventory. Finding a buyer is not always easy or
possible.
There is various other measure of liquidity that you will want to use to
determine our cash position.
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FOCUS ON LIQUIDITY MANAGEMENT
PURPOSE
This document sets out the minimum policies and procedures that
each institution needs to have in place and apply within its liquidity
management programme, and the minimum criteria it should use to
prudently manage and control its liquidity.
Although this document focuses on the institution’s responsibility for
managing liquidity, and is intended to address liquidity management
within the context of a strategic liquidity plan under ordinary or
reasonably expected business conditions, liquidity management
cannot be conducted in isolation from other asset/liability
management considerations, such as interest and foreign exchange
rate risk, or other risks. However, since liquidity determines the day-
to-day viability of an institution, it must remain the principal
consideration of asset/liability management.
Moreover, this document presents the management of liquidity
undifferentiated as to currency denomination, since in principle,
through the foreign exchange markets, commitments in one currency
may be met by the availability of funds in another. However,
institutions that conduct substantial business in foreign currencies
need to make distinctions between the management of liquidity in
domestic currency (Jamaican dollars) and that in other currencies.
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DEFINITION
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Sound and prudent liquidity policies set out the sources and amount of
liquidity required to ensure it is adequate for the continuation of
operations and to meet all applicable regulatory requirements. These
policies must be supported by effective procedures to measure,
achieve and maintain liquidity.
Operating liquidity is the level of liquidity required to meet an
institution’s day-to-day cash outflow commitments. Operating
requirements are met through asset/liability management techniques
for controlling cash flows, supplemented by assets readily convertible
to cash or by an institution’s ability to borrow.
Factors influencing an institution’s operating liquidity include:
• cash flows and the extent to which expected cash flows from
maturing assets and liabilities match; and
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Holding assets in liquid form for liquidity purposes will often involve
some loss of earnings capacity relative to other investment
opportunities. Nevertheless, the primary objective with respect to
managing the liquid asset portfolio is to ensure its quality and
convertibility into cash.
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Funding Policies
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1
2 ROLE OF THE BOARD OF DIRECTORS
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ROLE OF MANAGEMENT
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BANK LIQUIDITY
Liquidity for a bank means the ability to meet its financial obligations
as they come due. Bank lending finances investments in relatively
illiquid assets, but it fund its loans with mostly short term liabilities.
Thus one of the main challenges to a bank is ensuring its own liquidity
under all reasonable conditions.
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Bank Runs
Possible Solutions
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3. LIQUIDITY ISSUES
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If a situation arises
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Benefits to a client
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160.0
140.0
120.0
USD billion
100.0
80.0
60.0
40.0
20.0
0.0
10-May-05
01-Apr-01
22-Nov-02
21-Apr-03
06-Mar-06
02-Nov-00
29-Aug-01
07-Jan-00
05-Jun-00
26-Jan-02
25-Jun-02
18-Sep-03
07-Oct-05
15-Feb-04
14-Jul-04
11-Dec-04
Date
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1
2
3
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6000
4000
2000
0
-2000
Rs. Crore
-4000
-6000
-8000
-10000
-12000
-14000
-16000
Apr-95
Apr-01
Apr-04
Apr-98
Oct-02
Oct-05
Jan-96
Oct-96
Jul-97
Jan-99
Oct-99
Jul-00
Jan-02
Jan-05
Jul-03
Months
20000
0
Rs. crore
-20000
-40000
-60000
-80000
-100000
5-Jun-00
5-Feb-01
5-Jun-01
5-Oct-01
5-Feb-02
5-Feb-03
5-Jun-03
5-Oct-03
5-Feb-04
5-Jun-04
5-Oct-04
5-Feb-05
5-Oct-00
5-Jun-02
5-Oct-02
5-Jun-05
5-Oct-05
5-Feb-06
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reverse repo rate was reduced to 6.0 per cent and aligned with bank
rate. Normal facility and backstop facility was merged into a single
facility and made available at a single rate. The third stage of full-
fledged LAF had begun with the full computerisation of Public Debt
Office (PDO) and introduction of RTGS marked a big step forward in
this phase. Repo operations today are mainly through electronic
transfers. Fixed rate auctions have been reintroduced since April 2004.
The possibility of operating LAF at different times of the same day is
now close to getting materialised. In that sense we have very nearly
completed the transition to operating a full-fledged LAF.
With the introduction of Second LAF (SLAF) from November
28, 2005 market participants now have a second window to fine-tune
the management of liquidity. In past, LAF operations were conducted
in the forenoon between 9.30 a.m. and 10.30 a.m. SLAF is conducted
by receiving bids between 3.00 p.m. and 3.45 p.m. The salient features
of SLAF are the same as those of LAF and the settlement for both is
conducted separately and on gross basis.
The introduction of LAF has been a process and the Indian
experience shows that phased rather than a big bang approach is
required for reforms in the financial sector and in monetary
management.
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The call rate has been largely within a corridor set by the repo
and reverse repo rates, imparting greater stability in the financial
markets. As has been mentioned, the emergence of corridor was
gradual. The transition is not a menu choice as is sometimes viewed
in text books.
LAF has now emerged as the principal operating instrument of
monetary policy. Although there is no formal targeting of overnight
interest rates, the LAF is designed to nudge overnight interest rates
within a specified corridor, the difference between the fixed repo and
reverse repo rates, currently 100 basic points. The LAF has enabled
the Reserve Bank to de-emphasise targeting of bank reserves and
focus increasingly on interest rates. This has helped in reducing the
CRR without loss of monetary control.
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repo rates which was set at 200 basis points initially and was widened
to 250 basis points in August 2003 was lowered to 150 basis points in
March 2004, to 125 basis points in October 2004 and further to 100
basis points in April 2005. The call rates have remained anchored
around the lower corridor since June 2002, except for a brief period
during February-April 2003 and between October 2004 and January
2005. Again since October 2005, the system appears to have clearly
moved from enduring surplus to marginal deficits.
Chart-4: Call M oney Rates
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35
30
25
Per cent
20
15
10
5
0
Nov-90
Dec-94
Nov-97
Dec-01
Jul-02
Feb-03
Nov-04
Jun-91
Jan-92
Mar-93
Oct-93
May-94
Jul-95
Feb-96
Jun-98
Jan-99
Mar-00
Oct-00
May-01
Jun-05
Jan-06
Sep-96
Sep-03
Aug-92
Apr-97
Apr-04
Apr-90
Aug-99
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25.00
20.00
Call Money Reverse Repo Repo
15.00
Per cent
10.00
5.00
0.00
5-Feb-06
5-Jun-00
5-Oct-00
5-Feb-01
5-Jun-01
5-Oct-01
5-Feb-02
5-Jun-02
5-Oct-02
5-Feb-03
5-Jun-03
5-Oct-03
5-Feb-04
5-Jun-04
5-Feb-05
5-Jun-05
5-Oct-05
Monetary management since mid-2002 has clearly focused on 5-Oct-04
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initially even while capital flows had distinctly increased since 1993-
94. However, in face of large surplus liquidity since 2000, MSS was
evolved as a very useful instrument of monetary policy to sustain open
market operations. MSS has marginal costs, but it has helped the
monetary authorities manage business and liquidity cycles through the
surpluses and the deficits. With MSS, the monetary authorities now
have the option of assigning LAF for day-to-day liquidity
management, using MSS for addressing semi-durable liquidity
mismatches, while using outright sales/purchases of dated securities
for truly long-term liquidity surpluses or deficits. The MSS experience
tells us that operating framework and procedures undergo changes and
one need to keep innovating to calibrate market operations to the
evolving liquidity conditions.
Fourth, by focusing on the microstructure of the markets and by
facilitating development of a wider range of instruments such as
Collateralised Borrowing and Lending Obligation (CBLO)4, market
repo, interest rate swaps, Certificates of Deposit (CDs) and
Commercial Papers (CPs), in a manner that avoided market
segmentation while meeting demand for various products, liquidity
management could be placed on a much firmer footing. Market and
central bank practices evolved to institutional developments.
However, the payment and settlement system proved to be the most
difficult area, but one which delivered the enabling environment for
micro and macro developments supportive of the liquidity
management procedures now in place. The focus on micro-aspects
reinforced the central bank's ability to signal and transmit policy
changes.
Fifth, with efforts to build up indirect instruments for liquidity
management, the transmission of monetary policy has improved. The
link between overnight interest rates and yields on T-bills and liquid
dated securities has become far stronger. While the lending rates and
even more so deposit rates have been taking considerable time to
adjust, the strength of the transmission has been in evidence in recent
periods. It is important to note that in a situation of large surplus
4
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With the splurge in the credit off-take in the recent past, banks have
had to increase their reliance on bulk funding sources. At the same
time many of them have also been paring their excess Statutory
Liquidity Ratio (SLR) portfolio to fund the credit growth. While this
strategy helped them till the recent past, it is unlikely to help them in
future given the fact that most of the bank’s SLR portfolio are just
about adequate to meet the statutory requirements, hence leading to a
scramble to garner bulk deposits.
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CONCLUSION
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REFERENCES
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WEBLIOGRAPHY
• www.google.com
• www.kognostech.com
• www.bankofJamaica.com
• www.icraratings.com
• www.aleri.com
• www.keedsee.com
• www.hsbcbank.com
• www.banknetindia.com
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