What is the structure of liquidity management? (2024)

What is the structure of liquidity management?

A global liquidity management structure consists of accounts of different entities operating at various locations (within a country or across different countries) linked together and pooling the funds into a single location for either re-allocation or investment.

Government deposits

For example, when the government receives taxes into its account, liquidity is withdrawn from the system as ES balances of the banks are used to make payments to the government's account at the Reserve Bank. This process increases the structural liquidity deficit of the financial system.

Liquidity management is the proactive process of ensuring a company has the cash on hand to meet its financial obligations as they come due. It is a critical component of financial performance as it directly impacts a company's working capital.

Liquidity management is an important task of a company's treasury department. The main task is to ensure the liquidity of the company at all times and to make sure that there is always enough money available to pay the company's bills and make investments without facing a liquidity crisis.

Finance teams use liquidity management to strategically move funds where they are needed. For example, a CFO may review the balance sheet and see that funds currently tied up in one area can be moved to a critical short-term need to maintain day-to-day operations.

12.7 The Statement of Structural Liquidity (Annex I) may be prepared by placing all cash inflows and outflows in the maturity ladder according to the expected timing of cash flows. A maturing liability will be a cash outflow while a maturing asset will be a cash inflow.

This is usually done by comparing liquid assets—those that can easily be exchanged to create cash flow—and short-term liabilities. The comparison allows you to determine if the company can make excess investments, pay out bonuses or meet their debt obligations.

Cash flow monitoring and cash flow planning are the two types of liquidity management. Cash and liquidity management can be executed through 5 steps: data gathering, cash reconciliation, cash positioning, data analysis, and bank and signatory management.

The balanced liquidity management strategy entails combining both asset and liability management. It entails storing a portion of the expected demands for liquidity in assets while backstopping other anticipated liquidity needs by advance arrangements for lines of credit from potential suppliers of funds.

Who is responsible for liquidity management?

A bank is responsible for the sound management of liquidity risk.

Management of liquidity risk is critical to ensure that cash needs are continuously met. For instance, maintaining a portfolio of high-quality liquid assets, employing rigorous cash flow forecasting, and ensuring diversified funding sources are common tactics employed to mitigate liquidity risk.

Secondary markets in financial instruments have also become an important source for liquidity management, which banks can rely on manage their liquidity. However, for Islamic banks, the instrument has to asset based; therefore, it is more closely related to the debt (bond) capital markets.

Liquidity management should be a priority for all companies. It gives a clear indication of financial health, and it provides visibility into how well a company can afford its current and future debts, short-term investments, obligations, and spend with its liquid cash and assets at hand.

Answer and Explanation:

Assets and liabilities are the two important factors considered while managing liquidity. For banks, it has been observed that asset-based liquidity is more significant than liability-based...

Liquidity definition

Liquidity is a company's ability to convert assets to cash or acquire cash—through a loan or money in the bank—to pay its short-term obligations or liabilities.

Definition: Liquidity means how quickly you can get your hands on your cash. In simpler terms, liquidity is to get your money whenever you need it. Description: Liquidity might be your emergency savings account or the cash lying with you that you can access in case of any unforeseen happening or any financial setback.

The measures include bid-ask spreads, turnover ratios, and price impact measures. They gauge different aspects of market liquidity, namely tightness (costs), immediacy, depth, breadth, and resiliency.

The liquidity ratio is a computation used to measure the ability of the company to pay its short-term debt. It can be calculated by using the current ratio, the quick ratio (or acid-test ratio), and the cash ratio. The current ratio is equal to current assets divided by current liabilities.

This is the risk affecting or potentially affecting results or capital as a result of the Bank being incapable of meeting its payment obligations upon maturity, without incurring unacceptable losses.

How assets are typically organized in terms of liquidity?

Order of liquidity is how a company presents their assets in the order of how long it would take to convert them into cash. Most often, companies list these assets on their balance sheet financial reports to help their employees and investors understand how much immediate spending power the business has.

Front office

Responsible for carrying out day-to-day analysis and transactions relating to the management of funding, risk, cash and liquidity.

During the day, the treasury department gathers the details and the company's net position is determined. A decision is then made on what to do if there is a surplus or negative amount of cash in a bank account overnight. This determines the company's cash/liquidity position for the day.

At the root of a liquidity crisis are widespread maturity mismatching among banks and other businesses and a resulting lack of cash and other liquid assets when they are needed. Liquidity crises can be triggered by large, negative economic shocks or by normal cyclical changes in the economy.