Monitoring and Planning for Bank Liquidity

Liquidity analysis involves the entire balance sheet, as well as off-balance-sheet activity. Liquidity management is largely about being sure that adequate, low-cost sources of funding are available on short notice. This effort must be balanced against the impact on profitability, because liquid assets generally carry a lower rate of return. Similarly, stable funding sources are usually more costly than those that are more volatile. Here are two tools to help you monitor and plan your bank’s liquidity.

Ratio analysis

Ratio analysis focuses on the bank’s current liquidity position, trends and future liquidity needs. Advanced planning permits a more reasoned, less frantic and less costly approach to raising funds to meet liquidity requirements.

Liquidity forecasts

A forecast of liquidity needs is helpful in planning for adequate funding sources, even in the face of adverse circumstances.

A cash-flow projection worksheet describes an institution’s liquidity profile under an established set of assumptions about the future. The set of assumptions used in the cash-flow projection constitutes a scenario to forecast the bank’s funding needs. Often, banks generate multiple forecasts based on different scenarios. For example, they make cash-flow projections for normal course of business scenarios; short-term, institution-specific stress scenarios; and more severe, intermediate-term, institution-specific stress scenarios. Each scenario requires assessing the likelihood of funding needs and planning for potential funding shortfalls.

Access the Try This column to view a sample worksheet that might be used to forecast your bank’s funding needs. This worksheet divides funding into who controls the decision regarding sources and uses of bank funding—customers or management.