FI 413 Lecture Notes - Lecture 9: Liquidity Risk, Reserve Requirement, Demand Deposit
Document Summary
Most bank liabilities (deposits) can be withdrawn with little or no notice, and deposits are a large percentage of assets. Liquidity problems liquidity problem (1): unexpected increases in loans outstanding: new loan production above expectations, drawdown of lines of credit, including credit cards. If a bank has a high percentage of assets in credit cards, heloc and business ci (have line of credits) loans, it will have high liquidity risk. Liquidity problem (2): unexpected net deposit withdrawals: unexpected checking/now/mmda/savings account withdrawals, unexpected non-renewal of time deposits, early withdrawal of time deposits, inability to refinance maturing debt. The higher the (number of depositors/total deposits) ratio, the lower the liquidity risk for the bank. Less portion of total deposits are being withdrawn as a percentage. Banks with more deposits from local rather than out-of-town individuals face less liquidity risk. Banks with more jumbo deposits over ,000 face higher liquidity risk.
