Definition of liability management

The process whereby banks manage liabilities and buy in (borrow) funds when needed from the markets for interbank deposits, large-sized time deposits and certificates of deposit (CD).

Example

According to the Treasury report, Northern Rock, the first bank failure in the 2007-8 banking crises followed a ‘reckless business model’ where nearly 30% of its funding was bought-in short-term wholesale funds that were used to finance long-term mortgage business.

The bank was over-dependent on liability management to finance its credit business.  When wholesale funding dried up the bank had a liquidity crisis that rapidly turned into a capital crisis. [1]

FT Articles & Analysis