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Why insuring bank deposits has become a necessary evil - 9 months ago, 17 Apr 07:12

By: Otieno Odhiambo

Financial institutions including commercial banks face an array of risks to the extent that risk management has become a major concern for managers of financial institutions.

The two risks on the desk of a bank’s chief executive are credit risk and liquidity risk. Both risks can send a bank into insolvency - exposing depositors and shareholders to losses.

These two risks are interlinked. The liquidity risk is found on the liability side of the balance sheet of a bank. It occurs when depositors unexpectedly seek to immediately withdraw their deposits.

But banks cannot be keeping enough cash in their vaults to meet that kind of demand; and in any case, most deposits are in the form of a loan to those who borrowed from the lenders.

It will be unwise of a bank to recall loans because that will hurt its reputation. The liquidity risk on the asset side of ...
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