Ways in Which a Depository Institution Can Accommodate Withdrawal and Loan Demand

Besides facing credit risk and interest rate risk, a depository institution must be prepared to satisfy withdrawals of funds by depositors and to provide loans to customers. A depository institution can accommodate withdrawal and loan demand by having sufficient cash in hand. The ways in which enough cash can be made available are:

1.       Attracting Deposits

Deposits are the major source of a depository institution in maintaining liquidity status. Deposits can be attracted through a carefully planned sales and promotion which can lure customers to deposit with the firm. Adverts should be designed in such a way that customer’s interest and confidence is maximized to deposit their monies within the firm.

2.       Selling Securities (if available)

A depository institution can achieve this aim also by selling securities that it currently owns. This can be debt or equity securities. These securities can be sold to investors who pay monies in return of either being a shareholder (that is by purchasing equity) or a creditor/debenture holder (that is by purchasing debt securities). The investment capital from the sale of securities can be used to meet the firm’s withdrawal and loan obligations.

3.       Borrowing: This is one of the major sources in which depositary institutions can obtain money to meet withdrawal and loan demand of its customers. Existing securities of the firm can be used as collateral to secure loans from the federal government (central bank) and other banks.

4.       Money Market: Depositary institutions can raise short-term funds by investing into the money market. The money market is a market for the trade of highly liquid short term debt instruments with maturities of not more than one year. Funds can be raised within a short time which can be used to settle liquidity problems.