Operation banking Essay Example | Topics and Well Written Essays - 1250 words

Operation banking - Essay Example This led to better methods of measuring and managing liquidity. There are two types of liquidity ratios as explained by Palmaratha (2010, 397).funding liquidity risk and market liquidity risk. Funding liquidity is measured by the ability of the bank to meet the expected and unexpected future and present cash flows, as well as the collateral needs without affecting the daily operation of the firm or company. Market liquidity risk on the other hand is measured by the ability of the company to offset a specific position at the market price due to inadequate market disruptions or market depths. The two risks might inmost cases be dependent on one another in that, while investors demand higher compensation for the increased risks, the need for funding liquidity would certainly rise since the liquidity prevailing in the market would make it difficult to dispose of assets in order to raise the required funds. To manage the liquidity risk as Gugliemo (2008) explained would entail defining an d indentifying how much liquidity is available in the company. This includes the contingency, operational and reserve liquidity. Afterwards the company has to establish the accessibility of the liquidity as well as the relative costs involved. Gugliemo further explained that, determining the needed operational liquidity in the short term as well long term basis would work well in managing the liquidity risk. The determination of the possible changes in the market conditions and the expected changes in the liquidity needs and cash availability are also strategic methods of managing the liquidity risk in the company. The presence of sufficiently early warning systems that would allow a strategic action prior to the actual problem would be of importance in mitigating and managing the liquidity risks. Gugliemo (2008) further explained the importance of process and controls that would ensure successful execution of action plans in managing the liquidity risks. Measurement and effective m anagement of interest rate risks (IRR) calls for the effective identification and quantifying of the risk. There are various tools that have been use to measure the interest rate risk as well as to hedge them to effectively reduce the adverse impacts on the bank balance sheet as Bhole (2009, 317) explained. The instruments mostly used for the measurement of the interest rate risk are the maturity gap, simulation modeling, duration and modified duration as well as value at risk (Bhole, 2009:317). Maturity gap analysis is the simplest technique in analyzing and calculating IRR exposure. The maturity gap is used to measure the dfirection and extent of asset liability deviation. The maturity gap is in most case computed on assets and liabilities having a different maturity period in a specific time frame. Bhole further argued that the gap is an assessment on the pricing gap between the interest gained by banks on the assets and the interest paid on its liabilities over a given time fram e. It has been used as a tool to highlight the net interest income exposure of a bank as a response to the prospective changes in the interest rates in different maturity buckets. A positive gap would indicate an excess of repriced assets over the