Banking and the Management of Financial Institutions - General Principles of Bank Management - Liquidity management

4 important questions on Banking and the Management of Financial Institutions - General Principles of Bank Management - Liquidity management

What 4 options does a bank have when there is shortfall?

- Borrowing on the interbank market
- Reducing loans
- Securities sales
- Borrowing from the Fed (ECB)

What extra costs are there with borrowing money for shortfall?

Borrowing: interest rate
Securities sale: brokerage and other transaction costs
Federal Service: interest payment based on discount rate

How do you reduce loans for shortfall?

It is the most costly way of acquiring reserves:
- calling in loans
- other banks purchasing loans at discount
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Why do banks hold excess reserves although loans earn higher returns?

Excess reserves makes sure that the bank doesn't have to incur costs that you would have if you would be:
• Borrowing from other banks
• Selling securities
• Borrowing from the central bank
• Calling in or selling off loans

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