The future of branch cash holdings management is here: New Markov chains

Abstract

Liquidity management is one of the main concerns of the banking sector since it provides control in key areas such as treasury management, working capital financing and business valuation. Under the assumption that branch efficiency makes a fundamental contribution towards the effective performance of the global banking institution, this paper provides a new methodology (Markov Chains by blocks) in order to achieve knowledge on the branch cash holdings: conditions which ensure optimal cash holdings, recurring properties which help to better predict cash holdings shifts and the study of the branch cash holdings steady-states using Ergodic Theory. These findings will let bank managers know the time validity of the current cash holdings. This is a crucial advantage to ensure efficient cash management: while helping keep banking institutions on sound financial footing by guaranteeing the compulsory-by-law safety cushion, it also allows bank managers to make sound decisions upon fund investments.