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.