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Banking Strategy, Credit Appraisal, and Lending DecisionsA Risk–Return Framework$
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Hrishikes Bhattacharya

Print publication date: 2011

Print ISBN-13: 9780198074106

Published to Oxford Scholarship Online: September 2012

DOI: 10.1093/acprof:oso/9780198074106.001.0001

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Liquidity Management and Assets-Liabilities Strategy

Liquidity Management and Assets-Liabilities Strategy

(p.32) 2 Liquidity Management and Assets-Liabilities Strategy
Banking Strategy, Credit Appraisal, and Lending Decisions

Hrishikes Bhattacharya

Oxford University Press

This chapter discusses liquidity management theories such as the commercial loan theory, shiftable theory, and anticipated income theory. It assesses the reasons for most liquidity problems of banks, highlights the need for liquidity planning, and presents a liquidity model for banks. It shows that liquidity management in a bank is closely linked with its assets-liabilities strategy. A fully matched position is ideal — a self-liquidating balance sheet — but this is not observable in real life, because of the conflicting objectives of a bank and its borrowers, nor is it desirable due to its negative impact on profitability; a reasonable level of mismatch enhances profitability.

Keywords:   liquidity management theories, liquidity planning, liquidity ratios, pool of funds strategy, asset allocation strategy, maturity matching strategy, self-liquidating balance sheet, asset-liabilities strategy

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