New Opportunities in Liquidity Management

The assigned purpose of this paper is to explore new opportunities in liquidity management. The term is understood to mean a profitable mix of asset and liability management in the demanding new economic environment that is developing. My own preference is for the term "balance-sheet management" as a more accurate and concise way to describe the process. To establish a kind of controlling context for this discussion, I first will review some of the circumstances surrounding the passage of the Depository Institutions Deregulation and Monetary Control Act, its meaning for financial institutions, and especially its effects on liability management. The latter two portions of the paper will deal first with broader funds management techniques of large banks and then with funds-management challenges and opportunities for smaller agricultural and community banks. During the past three decades, funds management at large commercial banks has been characterized by three basic approaches. In the 1950s the focus was on the asset side of the balance sheet. It shifted to the liability side in the 1960s and early 1970s, and in the second half of the 1970s the two methods were integrated. Although some of the important methods and techniques that may be employed by large banks will not work for banks whose resources are more limited, there obviously are useful parallels that apply here. This suggests at the outset that one of the strongest assets a smaller bank can develop to guide it through the coming years is a flexible management attitude. The scene can be set quickly with a brief summary of three key aspects of the current banking environment. First, the banking industry is losing its strong position as a financial intermediary. There are several powerful factors behind this development, all related to inflation.