CHAPTER

II

LIQUIDITY MANAGEMENT

339

Northeast National Bank

Thelast few years had been quite profitable for Northeast ationalBank, despite increasing competition from out-ofte competitors in its home state. Northeast had increased talassets over the last five years from $300 million to $500 . ion and was starting to' enjoy some scale economies m the larger size of operations and recent organizational nges.Ten years ago changes in federal banking laws had openedup interstate branching in the nation. A low-cost portunity to enter new markets presented itself-branch ces did not require (1) applying for new bank charters, ) a CEO or board of directors, and (3) high operating and rhead costs. Instead, branch offices could be operated ith a manager and many operations of the branch chaned through the main bank office, including paperwork mortgage loans, most computerized record keeping, . e transfers of funds, payrolls, etc. The cost savings of ch banking had enabled Northeast to increase its profdespite growing competition and use the retained earngs to expand its reach in the area. At the present time, rtheast had five branch offices located within a twentye radius of the main office, with two of these offices ted across a nearby state line. Thelarger size and different configuration of operations of rtheast had changed its liquidity management, It had me essential that the main office for a branch network closely with the branch managers on their liquidity needs sources.Unfortunately, no formal system of control over liquidityfunction had formally developed over the last ten , as most liquidity issues were overcome by strong cash from recent cost savings on branch operations. However, ther banks in the state also have been modifyo their organizational structure to take advantage of operg cost savings from branching. A competitive trend that beenemerging in the last year is the use of these savings otherbanks to lower loan rates and raise deposit rates rel. to Treasury rates of interest. Thus, profit margins are . ning to return to previous levels that existed prior to federalrelaxation of branch banking laws. JohnThorpe, vice president of operations for Northeast, . ed at work Monday morning to find a memorandum CEOGeorge Schindler requesting a strategic report on idity management issues that would need 'more in-depth analyses in the next six months. Mr. Schindler asked that the following questions be discussed in the report: How is liquidity defined? How is liquidity measured at the branch office level in relation to the bank organization as a whole? How does the branching structure change liquidity risks for the main office? How does the branching structure affect the liquidity risks of each individual branch office? Does it make sense to evaluate the liquidity of the consolidated branching organization or should liquidity analyses focus on each operating branch as well as the main office? How can the bank communicate its liquidity strengths to outside observers who only can obtain data on the consolidated bank organization? '

After calling the branch managers, John learned that each branch had a different market niche and normally (but not always) referred larger customer needs for credit and other services to the main office. The main office was located in a large suburb of a major U.S. city. One branch was located near a university and specialized in small, retail deposit accounts for students with few credit services, except for auto loans and some other consumer installment loans: A second branch was located on the main street of a small nearby community and offered small business deposit and loan services for the most part. A third branch was not far from the main office at a convenient customer location that helped support both retail and commercial services for the main office. The fourth branch tended to emphasize auto loans due to its close proximity to a number of automobile dealerships that were concentrated in one part of town. The fifth, and last, branch office was larger than the other branches and offered a full line of financial services, with the exception of wholesale banking services to large corporate clients. With this information in mind, John Thorpe has asked you, as his assistant, to write a two-page report briefly addressing each of the above questions, He has encouraged you to stick to fundamentals but, at the same time, show some creativity in handling the issue of branch offices.