As mentioned earlier, technical
approach focuses on the liquidity position of the bank in the short run.
Liquidity in the short run is primarily linked to the cash flows arising due to
the operational transactions. Thus, when technical approach is adopted to
eliminate liquidity risk, it is the cash flows position that needs to be
tackled. The bank should know its cash requirements and the cash inflows and
adjust these two to ensure a safe level for its liquidity position.
Working Funds Approach and the Cash
Flows Approach are the two methods to assess the liquidity position in the
short run. Of these two approaches, the former concentrates on the actual cash
position and depending on the factual data, it forecasts the liquidity
requirements. The latter approach goes a step forward and forecasts the cash
flows i.e. estimates any change in the deposits withdrawals credit
accommodation etc. Thus apart from assessing the liquidity requirements, it
also advises the bank on its investments and borrowing requirements well in
advance.
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