Funding Liquidity and Managing Liquidity explained

The International Monetary Fund (IMF) defines funding liquidity as “the ability of a solvent institution to make agreed-upon payments in a timely fashion”. According to the IMF, funding liquidity is the ability lending agency agrees payment with immediacy. Funding liquidity is the availability of credit to finance the purchase of financial assets for a business and also capability to assume liability and settle obligations.

Liquidity management is an important aspect of monetary policy implementation. It serves as a tool through which commercial banks avoid over- liquidity and under-liquidity and their costs. Liquidity management assists commercial banks in trading off between risk and return; and liquidity and profitability. Although companies and governments that have debt obligations face liquidity risks, the liquidity position of commercial banks is more important especially scrutinized by banking regulator. The Central bank (RBI) assumes responsibility for evening out swings in demand relative to demand on its own initiative, rather than waiting passively for individual banks to come to it.  Once Central Bank begins to supply or absorb liquidity through market intervention, the discount window plays an important, but subordinate safety valve role by providing the short-run reserve needs of the banking system for purposes of meeting short term liquidity obligations.  Therefore, every commercial bank will have Asset liability Management system for measuring and managing various risks that arise due to mismatches between the assets and liabilities exposed during the course of their operations.