The German University in Cairo (GUC) Spring 2017

Faculty of Management Technology Dr. Mona Elbanan

Finance Department Bank Management

Tutorial Sheet 5
CH.11 Liquidity and Reserves
Subject Management: Strategies and Policies

Problem 1:
Suppose that a bank faces the following cash inflows and outflows during the coming
week: (a) deposit withdrawals are expected to total $33 million, (b) customer loan
repayments are expected to amount to $108 million, (c) operating expenses demanding
cash payment will probably approach $51 million, (d) acceptable new loan requests
should reach $294 million, (e) sales of bank assets Concept Check are projected to be $18
million, (f) new deposits should total $670 million, (g) borrowings from the money
market are expected to be about $43 million, (h) nondeposit service fees should amount
to $27 million, (i) previous bank borrowings totaling $23 million are scheduled to be
repaid, and (j) a dividend payment to bank stockholders of $140 million is scheduled.
What is the banks projected net liquidity position for the coming week?

Cash Inflows Cash Outflows

Customer Loan Repayments $108 Deposit Withdrawals $33
Sales of Bank Assets 18 Operating Expenses 51
New Deposits 670 New Loan Requests 294
Money-Market Borrowings 43 Repayment of Previous Borrowings 23
Nondeposit Service Fees 27 Dividend to Stockholders 140

Total Cash Inflows $866 Total Cash Outflows $541

Net Liquidity
Position Total Cash Total Cash
Projected for = Inflows - Outflows
the Coming Week

= $866 million - $541 million

= + $325 million
The German University in Cairo (GUC) Spring 2017
Faculty of Management Technology Dr. Mona Elbanan
Finance Department Bank Management

Problem 2:
Suppose that a bank estimates its total deposits for the next six months in millions of
dollars to be, respectively, $112, $132, $121, $147, $151 and $139, while its loans (also
in millions of dollars) will total an estimated $87, $95, $102, $113, $101 and $124,
respectively, over the same six months.
Under the sources and uses of funds approach, when does this bank face liquidity
deficits, if any?

Estimated Liquidity
Change in Loans Deficit or Surplus
Change in Deposits

$ --- $ --- $ ---

+20 +8 +12
-11 +7 -18
+26 +11 +15
+4 -12 +16
-12 +23 -35

Clearly, the bank has projected liquidity surpluses (which should be profitably invested)
in three out of six months, but a deficit is estimated for the third and last month which
will have to be covered through borrowings and possibly through the sale of liquid assets.

Problem 3:
Suppose that a banks liquidity division estimates that it holds $19 million in hot money
deposits against which it will hold an 80 percent liquidity reserve, $54 million in
vulnerable funds against which it plans to hold a 25 percent reserve, and $112 million in
stable or core funds against which it will hold a 5 percent liquidity reserve. The bank
expects its loans to grow 8 percent annually; its loans currently stand at $117 million, but
have recently reached $132 million. If reserve requirements on liabilities currently
stand at 3 percent, what is this depository institutions total liquidity requirement?

Total Liquidity Requirement = 0.80 ($19 million - 0.03 x $19 million)

+ 0.25 ($54 million - 0.03 x $54 million)

+ 0.05 ($112 million - 0.03 x $112 million)

The German University in Cairo (GUC) Spring 2017
Faculty of Management Technology Dr. Mona Elbanan
Finance Department Bank Management
+ ($132 million +0.08 x $132 million - $117 million)

= $58.831 million

Problem 4:
Suppose Victoria Savings Bank's liquidity manager estimates that the bank will
experience a $375 million liquidity deficit next month with a probability of 10 percent, a
$200 million liquidity deficit with a probability of 40 percent, a $100 million liquidity
surplus with a probability of 30 percent, and a $250 million liquidity surplus bearing a
probability of 20 percent. What is this savings banks expected liquidity requirement?
What should management do?

Liquidity Deficits or Associated

Surpluses Probabilities

-$375 million 10%

-$200 million 40
+$100 million 30
+$250 million 20
100%

The bank's expected liquidity requirement is:

Expected Liquidity Requirement = 0.10 *(-$375 million) + 0.40 * (-$200 million) +
0.30* (+$100 million) + 0.20 * (+$250 million)
= -$37.5 million - $80 million + $30 million + $50
million = -$37.5 million

Faced with a expected liquidity deficit the bank's liquidity manager must still begin
preparing for meeting the institution's cash needs through arranging for credit lines or
deposits from other banks and actual or potential deposit customers and strengthening the
bank's liquid asset position.