If excess reserves are not available how a bank manages-00182
This subjective question is related to the book/course
vu cs001 Computer Proficiency License .
It can also be found in
vu cs001 Mid Term Solved Past Paper No. 3.
Question 1: If excess reserves are not available how a bank manages Liquidity risk?
Answer:
One way of managing liquidity risk is to keep excess reserves but this is not profitable as reserve is interest free. There are two other ways through which a bank can manage liquidity risk.
- Adjusting other assets of balance sheet
- Adjusting liability side
In adjusting assets banks can instead of paying through reserves, fulfill withdrawal requirements by adjusting other assets. Banks can either
- sell their securities
- sell their loans
- refuse a loan renewal
The second option banks have is to
- adjust their liabilities.
- Borrow from other banks or central bank
- Attracting more deposits
