Case assignment

In order to prevent this state from continuing, the plaza of chief fiscal officer believes that $1 00 meg SAID WOUld embrace the hazard enervated by low level of cash and luculent securities and guarantee for the coasts financial stability. Types of Risks The main risk of exposure faced by collect from the low cash level is fluidity risk, and there are devil risks derived from liquidness risk infection risk and funding risk. Liquidity risk refers to an DAD get out have insufficient funds to meet its financial obligations when due.In fact, a low fluidity ratio in one coast could affect the entire system, in other words, it preserve lead to contagion risk that the payment system collapses as a result of slight by ADDIS in general. Hence manage equity adequately could derogate serious problems arise in the hereafter (Jasmine et a, 2012, IPPP). While the funding risk refers to an DAD is difficult to maintain sufficient funds to cover its loans. It is close related to li quidity risk since failure to rollover liabilities will result in a liquidity crisis for the AD.Causes of The Risks There are several causes of the liquidity risk. A liquidity risk could arise due to the mismatch in the maturity of the intrusts sources and uses of funds. The maturity mismatch is an imbalance between the average maturity of a ban? Assets and its liabilities. Observed by Agate (2009), approximately half of the funds in banking system are provided by deposits, and the majority of them are in relations or saving accounts that could be omitn immediately. Ender this unreasonable liability structure, when customers withdraw a great deal of deposits, a liquidity risk can be caused. 2. An economic factor can influence the liquidity risk within ADDIS (Somalis, 2010). For example, during a crisis, lenders are likely to panic and cause a run on their DAD to withdraw their funds. On the other hand, a boom in the economic yes could also cause a liquidity risk because of active demands for investment in various industries such as real estate, mining, etc.Most funds of these investments are from bank loans, which bring a doctrine risk (I. E. Borrower defaulting). Once the bank suffer a loss of its additions, the liquidity ratio will decrease thus increase the liquidity risk. 3. monetary policy could affect the liquidity risk in a bank as well. For example, if the come to rate is pass judgment to decrease in the future, customers will deposit now in order to decrease the loss of wealth. Meanwhile, bank loans will crease because customers will borrow money in the future due to low expected interest rate.However, when the interest rate is expected to increase in the future, firms demand for loan will blow up, and customers is loath to save money now due to expected high interest rate in the future, hence cause a liquidity shortage which give rise to liquidity risk. Solution NAB is facing a serious condition now where the liquidity ratio is low. It has t o come up with several strategies to manage the liquidity risk that is likely to cause a bank to bankruptcy. 1.The office of CROP believe that about $100 million ADD would solve the robber, because by holding this amount of cash, exchange resolving funds and liquid assets, it is able to maintain the liquidity when unexpected shortages of liquidity occur. Another method to manage liquidity risk is to balance asset and liability of the bank by matching the maturities. In order to do so, the bank deposits should be allocated in well-organized maturities assets. Hence, the demand for liquidity from the matured deposits could be fulfilled from the liquidity of the matured assets (Greenberg and Thacker, 1 995, Pl 72).