Liquidity risk is the uncertainty arising from a bank’s inability to meet its obligations when they are due, without incurring unacceptable losses. Liquidity risk includes the inability to manage unplanned changes in market conditions affecting the ability of the bank to liquidate assets quickly and with minimal loss in value. Internet banking increases deposit volatility from customers who maintain accounts solely on the basis of rates or terms. Increased monitoring of liquidity and changes in deposits and loans maybe warranted depending on the volume and nature of Internet account activities. In a nutshell, the Internet allows all transactions to occur in real time.
The management must therefore be prepared for immediate changes and consequently immediate solutions. An institution can control this potential volatility and expanded geographic reach through its deposit contract and account opening practices, which might involve face-to-face meetings or the exchange of paper correspondence. The institution should modify its policies as necessary to address the following e-banking funding issues:
- Potential increase in dependence on brokered funds or other highly rate-sensitive deposits.
- Potential acquisition of funds from markets where the institution is not licensed to engage in banking, particularly if the institution does not establish, disclose, and enforce geographic restrictions.
- Potential impact of loan or deposit growth from an expanded Internet market, including the impact of such growth on capital ratios.
- Potential increase in volatility of funds if e-banking security problems negatively impact customer confidence or the market’s perception of the institution.