Asset and Liability Management: The Banker’s Guide to Value Creation and Risk Control, Second Edition

Cash flow gap for ‘normal time’

The bank calculates the amount of cash coming in and going out over a fairly short time interval (the coming days) (Table 16.1).

Table 16.1. The net cash flow

	interest income
–	interest expense
–/+	margin calls
– –	operating expenses tax
+	reimbursement of principal on loans or bonds
– –	estimated amount of lending reimbursement of deposits
+	estimated amount of new deposits
	net cash flow

If the cash flow is positive, there is no liquidity problem.

If the cash flow is negative, the bank will have to plan borrowing on the interbank market or proceed with the sale of bonds.

In order to avoid meeting a liquidity problem, the bank will put a cap on the amount of money it needs to borrow over a certain period. For instance, this ...