The scope of bank balance sheet management covers all the activities involved in sourcing funds, investing funds, and optimizing portfolios mix and returns on investments. Treasurers lead in this responsibility. They advise on what proportion—and from which sources—of their banks’ capital funds should be applied in financing earning, fixed, and other assets. It is imperative, as part of the activities involved in this balance sheet management advice, for a bank to determine what should be the appropriate mix of funds in its financial structure. In doing so, the bank should seek to optimize spread between cost of borrowed funds and returns from investments in risk assets and securities.

Well-managed balance sheets bear the hallmark of sustaining liquidity at desired level. This is also a sure way for a bank to mitigate liquidity risk. Liquidity of a bank centers on its cash flow position. To put it simply, banks in which cash is constantly available to meet operational needs are liquid. The converse is also true—illiquid banks lack cash to fund operations. Incidentally, the balance sheet of a bank is a major source of cash available to the bank. Cash isolated from the balance sheet complements other cash flow sources in consolidating the liquidity of a bank. Treasurers of banks should approach balance sheet risk management from this perspective. One reason is that banks that are cash deficient are easily driven into liquidity crisis. There is yet another angle to the essence of cash in bank balance sheet management. Banks must always be liquid in order to meet their financial obligations and remain going concerns.

It is necessary—in structuring and managing risks in banks’ balance sheets—to devise effective strategies to generate and sustain cash flows at desired level. This entails balancing cash uses (assets) by cash sources (liabilities) as a means of attaining portfolios and earnings objectives of the bank. I must say, striking the right balance between these two opposing demands of banks’ balance sheets has often been elusive—or, rather, a tall order—for most banks. Yet bank balance sheet and liquidity risks are really mitigated when assets match liabilities one way or the other. Some think that matching in this sense is not possible—except in theory. However, treasurers discount this perspective and forge ahead with pragmatic matching techniques. Their ultimate goal, doing so, is to achieve their bank’s liquidity targets.