Bank Liquidity
Overview
Liquidity refers to a banks ability to meet its obligations as they come due. Essentially this means, as depositors withdraw their deposits,
or as bank loans mature, does the bank have cash to cover these withdrawals. It may well be that the bank has more assets than liabilities,
that is, it is not strictly bankrupt, but its assets are illiquid, meaning not cash, so when depositors withdraw funds, the bank is forced to sell
assets. This can be a problem is the assets are not easily sellable, meaning there is not active market in those assets. In such a scenario,
a bank is forced to sell assets at really cheap prices, the so called fire sale.
This corner reviews measuring liquidity from data on the banks call report. For information on liquidity modeling internal to a bank, please
see:
liquidity
Sources of Liquidity
When a bank considers its liquidity position, it doesnt just focus on how much cash on hand it has. This is because, it has outstanding loans
and other sources which will product cash over time. This means that the issue of building a liquidity buffer must forecast both
probably cash withdrawals as well as cash inflows over time.
- Cash Reserves
- Cash flow from Operations
- Assets that are sold for cash
- New Deposits
- Bank Borrowings and Issuance of Debt
- Other cash sources (example funding from new equity)
In general, these sources are usually categorized within 3 different categories
- Operating Cash Flow
- Asset liquidity - cash reserves and liquid assets
- Funding liquidity - ability to raise cash through additional borrowings
Liquidity Ratios
When analyzing a banks liquidity position from its financial statements and call reports, analysts often look at the following ratios.
- Liquid Assets Ratio - Total Liquid Assets / Total Assets
- Net Loans to Total Assets
- Customer Deposits to Total Deposits
- Loans to Deposits
- Loans to Customer Deposits
For information on analytics of bank liquidity from a perspective internal to the bank, please see:
bank liquidity
