Bank Director's Training | Asset & Liability Committee

What you need to know

Join the meeting

Review the Reports

The board´s response

Watch the Video

Factors that Affect Bank Liquidity

Sources of Market Risk

Practice

You need version 6 or newer of the Flash Player installed and JavaScript enabled in your browser to view this video.

For best performance, we recommend that you launch the video only if you have a high-speed (broadband) internet connection.

If you are using a dial-up (telephone) internet connection, we strongly recommend that you read the transcript of this video clip instead.

Madison McCard, committee chairperson, is ready to give the ALCO’s report. As you listen, think about the relationship between market risk and liquidity. Remember:

Potential sources of funds should be balanced against the likely need for funds.
The interest-rate sensitivity of assets (loans to bank customers and other bank investments) should be balanced against the interest-rate sensitivity of liabilities (customer deposits and other debts owed by the bank).
Both of these concerns should be balanced against the bank’s profitability goals.

What is Insights' expected need for funds? Does the "Visions for Success" loan program have any effects on these needs? What is the Insights Bank and Trust Asset and Liability Committee’s expectation with respect to the near-term direction of interest rates? Do you know the impact this will have on the investment strategy the ALCO is recommending?

Madison told us that there were no securities transactions to report for the month. However, the ALCO approved purchasing a five-year note issued by the Home Loan Bank of Topeka that would yield about 6.6 percent. The money to fund the purchase would come from the sale of $1.6 million of 3.78 percent U.S. Treasury notes coming due at the end of the month. She noted the decision to purchase the notes was based on the ALCO’s expectations of a near-term rise in interest rates.

Hi asked if there were any questions before voting on the ALCO’s recommended securities sale and purchase.

Do you have anything you would want to ask the committee?
Do you think approving the ALCO’s recommendation is a wise move?
What else would you want to know about before voting?

Like other businesses, banks need funds for operating expenses, such as payroll, rent and utilities. In addition, banks must have funds available to make loans and meet depositor demands. A bank’s ability to raise these funds quickly, and at a reasonable cost, is known as liquidity. If a bank cannot meet depositor demands, it is considered liquidity insolvent and can be closed. As a consequence, liquidity is an important matter that requires your attention.

Board members also oversee the management and control of their bank’s exposure to market risk. This responsibility effectively requires that directors know something about the sources of market risk for their bank. This section covers sources of bank market risk, with an emphasis on interest rate risk.

What do you know about the asset and liability management at your bank?

Lesson Objectives

After you complete this lesson, you should be able to:

Define the term liquidity risk.
Identify factors that can influence bank liquidity.
Identify sources of core and noncore funding for banks, including brokered deposits.
Define market risk.
Identify sources of market risk.