Question

Discuss optimality in bank liquidity management. How does uncertainty affect optimal bank liquidity?

Answer 1

Optimal Bank liquidity is a lebel of bank liquidity which is to be maintained by various banks in order to maintain a liquid cash flows and maintain adequate liquidity position in order to service their debt and also help the business expand without much glitch of liquidity freeze.

uncertainty is highly impacting the overall optimal liquidity management because future cannot be judged in advance and it cannot be precisely just so company should always be trying to discount various futuristic events but they cannot discount it accurately so there is always a high risk regarding uncertainty to optimal liquidity management.

when various adverse event in future have negative impact on the bank's profit and loss accounts, it will be impacting the liquidity of the bank to a higher extent on the negative side.