n the securities portfolio of the Federal Reserve System during the previous calendar quarter.
The reserve requirement on nonpersonal time deposits depends on their original maturity. As of 1990, depository institutions were required to hold reserves against nonpersonal time deposits with maturities of less than 1.5 years equal to 3 percent. The Fed's statutory operating range for this reserve ratio is from 0 to 9 percent. Depository institutions must also hold a three percent reserve against Eurocurrency liabilities.
In addition to meeting regulatory liquidity measurements, liquidity management involves estimating the demand for funds by the public and the provision of sufficient reserves to meet those needs. For example, a bank must be prepared to accommodate deposit withdrawals and loan requests in a timely manner. It is the function of liquidity management to estimate the size of these gaps and fund them in a manner consistent with maximizing shareholder wealth.
When liquidity needs are met in an unplanned way (through selling long-term investments or calling loans, for example, share holder value is likely to be reduced. The damage to the shareholders' position from poor liquidity planning is particularly evident when shortfalls are closed by failing to satisfy depositor demands or not accommodating legitimate loan customers. The inability of an institution to satisfy depositor withdrawal requests can lead to severe regulatory action. Regulatory action that results in the assumption or liquidation of the institution completely destroys shareholder value (as was the case with the savings and loan problems in the 1980s). Inadequate funding of the loan portfolio disrupts customer relationships and could permanently reduce a bank's market share. However, this does not mean that a bank's liquidity policy should be completely defensive. A flexible liquidity strategy includes the ability for the institution to take a...