A CHANCE-CONSTRAINED GOAL PROGRAMMING MODEL FOR BANK LIQUIDITY MANAGEMENT

The bank liquidity-management model presented herein is formulated as a chance-constrained goal programming model thus allowing uncertainty to be incorporated into a lexicographic solution of the problem. This model plans both for the reserve-short and reserve-excess bank, describing appropriate investment or disinvestment action during the computation period. The testing of the model was performed on two banks, one a small rural bank with assets of about $25 million, and the other a large metropolitan bank with assets well in excess of $1 billion, with the actual bank results and the prescribed strategy of the model being compared over a one-year period. Additionally, sensitivity analysis was performed on the model, providing valuable information concerning the risk-return relationships associated with each management goal. It is hoped that this model will provide bankers with both an effective diagnostic and operational tool in the development of liquidity-management planning decisions.