LIQUIDITY AND MARKET RISK MANAGEMENT :

As explained earlier, one of the important risks faced by banks is the liquidity risk. The banks’ treasury handles the liquidity management through money market and forex market operations; hence a careful strategy needs to be in place for market related activities.

Identification of Liquidity Risk: Review of asset and liability mismatch is one of the eye openers. There should be close control on the utilization of short term funds for long term assets and vice versa, that would lead to maturity mismatches. An effective credit monitoring and operations of the banks can reduce the impact of the liquidity risk. A good internal control review and online monitoring system, identification of weakness in the systems and procedure etc, would also assist the bank to manage the inflow and outflow of funds effectively.

Internal limits for cash management including foreign funds and an effective reconciliation of nostro accounts are some of the measures to reduce the impact of the liquidity risk.

The role of the treasury in managing the liquidity position is very important. The treasury should closely watch the market movements and accordingly handle the situations. To effectively monitor the risk, banks should set up limits for currency, country and adhere to investment exposure norms as well. A close watch on the macro level factors at different markets and ensuring necessary control measures of revising exposure limits and other aspects would also assist to manage the liquidity risk. Review and understanding the various features of the monetary policy and quarterly review by the Central Bank (Reserve Bank of India) and appropriately adjust the strategies would assist the banks in effectively managing the liquidity position.