mohammad valipour pashah

In the run – up to the 2007-2009 financial crises, Central Banks were celebrating their success on price stability amid their independence from government and virtues of their strong analytical framework of inflation targeting. However, the global financial crises paved the way to pounder about the financial stability sine qua non. Since history teaches us that Central Banks have always had a dual role: maintaining price stability and financial stability per se. In this context, the financial stability departments are expanding in different Central Banks of the world. It is worth to note that most Central Banks were established during the times of crises to finance the government and assume the role of financial crises management, in their early days. But at present, while the structures for financial stability are well articulated, somehow, the analytical models and the appropriate macro prudential tools to correct the financial system in times of crises are not developed, which are major challenges for the Central Banks to be applied de Jure. Thus many academic economists favor a rule-based system to ensure that the macro prudential tools are viable and efficient in time, while most Central Banks interested in discretion because according to them each situation is unique, quid pro qua.

Liquidity is a bank’s capacity to fund increase in assets and meet both expected and unexpected cash and collateral obligations at reasonable cost and without incurring unacceptable losses. In the context of banking, liquidity, or the ability to fund increases in assets and meet obligations as they come due, is critical to the ongoing viability of the banking institution. Since there is a close association between liquidity and solvency of banks, sound liquidity management reduces the probability of banks becoming insolvent, thus reducing the possibilities of bankruptcies and bank runs. Ultimately, prudent liquidity management as part of the overall risk management of the banking institutions ensures a healthy and stable banking sector. Effective liquidity risk management helps ensure a bank’s ability to meet its obligations as they fall due and reduces the probability of an adverse situation developing. This paper examines the sound practices for the liquidity risk management in banks. The paper goes along with the suggestions of the Basel Committee and Reserve Bank of India on management of liquidity risk. In this paper, we explain the meaning of liquidity, liquidity risk and liquidity management. It also discusses the process of building up of a liquidity risk management system.

Policies seeking to directly help the poor have an important role to play. But without sustained growth in per capita output and significant job creation, they will not succeed. Policies Promoting growth have been suggested, most notably by avoiding procyclical responses to macroeconomic shocks (especially from abroad), steering macroeconomic prices, such as exchange and interest rates, to support developmental objectives, pursuing industrial and trade policies involving increasing returns, promoting financial development, and making productive use of foreign aid. Ensuring national economies have sufficient policy space to achieve sustained growth and structural change should be the over-riding policy concern.