Commercial bank liquidity management

Bank liquidity management and optimal resource allocation of commercial bank Nostro accounts balances receive much less attention from the scientists compared to the questions on capital structure, funding, credit risk analysis and stress testing. Optimal liquidity management is a way to lower bank costs and risks, which are going to increase over time, especially when money markets are dry of free funds. There are two sides of the issue to be analyzed. The optimal resource allocation and corresponding accounts balances optimization are the first points to be considered. Then we should look at the process as a problem of liquidity requirements. In this article we formulate the procedure of optimal resource allocation up to a one-year horizon. The first part of the research is a one-month optimization: efficiency function and the related constraints of the corresponding accounts. The next step deals with the liquidity requirements (N3 and NSFR) restrictions, and balance sheet aggregation, and its influence on the liquidity requirements. With this in mind we develop inequations to specify long-term liquidity deficit. Finally, we create a consolidated mathematic model of optimal liquidity management up to a one-year horizon. In addition, we look at an alternative of short-term funding with premium to market to smoothen non-planned funds outflow.