Managing Liquidity in Banks
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Managing Liquidity in Banks

A Top Down Approach

Rudolf Duttweiler
Wiley, 2009
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A bank’s liquidity can mean the difference between its life and its death. A sudden drop in access to funding can bring down a financial institution in a matter of days, sometimes even hours – as the 2008 demise of Bear Stearns and Lehman Brothers aptly demonstrated. The bank reforms spawned from the 2008 financial crisis tend to focus on amounts and calculations of bank capital, but liquidity remains the most important indicator of bank stability. Economist Rudolf Duttweiler condenses his decades of experience he spent leading treasury functions at top global banks into this comprehensive reference book for those seeking a serious foundation in the complex field of liquidity management. From time to time, he leavens his technical approach – which can be hard to navigate – with a welcome dose of grounded, real-life counsel. getAbstract considers this specialized guide to bank liquidity management a must-read for financial and treasury professionals at all levels of experience.

Summary

Life-Giving Liquidity

The term “liquidity” can have myriad shades of meaning. For banks, liquidity takes on various guises as it relates to different banking activities. At its most basic level, liquidity refers to a bank’s “capacity to fulfill all payment obligations as and when they fall due – to their full extent and in the currency required.” Liquidity means having enough cash to meet liabilities as they arise. In contrast, failing to have that buffer in place leads to illiquidity.

A bank’s business drives its liquidity requirements. Financial institutions’ policies and activities dictate the types, amounts and maturity dates of its assets. Banks face a “liquidity gap” when short-term deposits finance long-term loans. Though deposits tend to be a reliable source of bank funding, depositors can withdraw their money at any time without prior notice.

Usually, the amount of deposits on hand isn’t enough to support the assets banks generate, so banks borrow money in the market. Lenders’ willingness to extend credit to a bank depends on their perceptions of that bank’s creditworthiness. Those market perceptions, normally reflected in the interest rates charged, ...

About the Author

Economist Rudolf Duttweiler is a professor of bank treasury management at the University of St. Gallen in Switzerland. He led treasury functions at Commerzbank and other European institutions.

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