This monograph focuses on the liquidity risk of commercial banks in the Visegrad countries in the period from 2000 to 2011. This risk is comprehensively evaluated with several different methods: six liquidity ratios, panel data regression analysis with fixed effects, probit model and scenario analysis. The liquidity position, net position on the interbank market and strategy of liquidity risk management differ significantly in individual Visegrad countries. The capital adequacy is the most important determinant of bank liquidity. However, some other factors such as size of the bank, credit portfolio quality or macroeconomic development are significant as well. All three tested stress scenarios would have a negative influence on bank liquidity. A run on the bank would have most serious impact on the bank liquidity in all Visegrad countries. The use of committed loans is the second most severe scenario for Czech and Slovak banks and a crisis confidence in the interbank market for Hungarian and Polish banks.
The recent turmoil on financial markets has made evident the importance of efficient liquidity risk management for the stability of banks. The measurement and management of liquidity risk must take into account economic factors such as the impact area, the timeframe of the analysis, the origin and the economic scenario in which the risk becomes manifest. Basel III, among other things, has introduced harmonized international minimum requirements and has developed global liquidity standards and supervisory monitoring procedures. The short book analyses the economic impact of the new regulation on profitability, on assets composition and business mix, on liabilities structure and replacement effects on banking and financial products.a??
Liquidity risk is always present in our financial system and has in the last years been a major contribution to the financial crisis. Market liquidity risk has an effect on for example security prices, risk management, and the speed of arbitrage. The banks and their funding liquidity drives the market liquidity risk. Liquidity crisis arises through losses, increasing margins, tightened risk management, and increased volatility. When this happens the traditional liquidity providers becomes liquidity demanders which affect prices in a negative way. To get a sound understanding of liquidity risk we have to specify and describe liquidity. Market liquidity and funding liquidity are two kinds of liquidity. Market liquidity can be described as good when a security is easy to trade. Easy to trade is defined as small bid ask spread, small price impact and high resilience. If a bank or investor have good funding liquidity they have good availability of funds by their own capital or from loans. The main objective in this paper is to show if liquidity risk has a significant impact on option price and depends on a real supply curve.
The recent market turmoil caused by the sub-prime crisis highlighted how several key factors can strongly affect the banks’ capability to preserve their financial equilibrium under stress. Current liquidity risk models demonstrated to undervalue extreme events affecting funding and market risk in global scenarios. There was not an integrated measurement tool able to cover all the dimensions of liquidity risk and commonly adopted by the majority of institutions. This work, therefore, intends to highlight the most significant features to consider in order to implement an effective liquidity risk measurement and management.
In research performed I watched to present methods of classification of loans and methods of establishing internal ratings within the banks. The result of the method of classifying assets consists in identifying good quality loans and their separation by the nonperforming loans. I also conducted an analysis of the situation of currency risk in case of the commercial banks. Thus I determined a set of indicators that can be measured both at the level of territorial units as well as the level of Central Bank. Another important issue addressed in the paper is the importance of ensuring solvency of the bank in overtaking difficulties generated by the financial crisis. In the chapter relating to the measurement the risk of interest rate I identified a technique used in banking to reduce interest rate risk, named GAP model or model of discrepancy between assets and liabilities of banks. In terms of reduction of the liquidity risk I presented a method that allows monitoring the indicators of liquidity on maturity bands. In the chapter concerning to management of the operational risk I presented a new method for managing this type of risk, respectively the insurance of operational risk.
In Banking, Asset and Liability Management (often abbreviated ALM) is the practice of managing risks that arise due to mismatches between the assets and liabilities (debts and assets) of the bank. Banks face several risks such as the liquidity risk, interest rate risk, credit risk and operational risk. Asset liability management (ALM) is a strategic management tool to manage interest rate risk and liquidity risk faced by banks, other financial services companies and corporations. Banks manage the risks of asset liability mismatch by matching the assets and liabilities according to the maturity pattern or the matching of the duration, by hedging and by securitization. . Modern risk management now takes place from an integrated approach to enterprise risk management that reflects the fact that interest rate risk, credit risk, market risk, and liquidity risk are all interrelated.
Following the government''s decision to shift from command economy to a free market one in 1991, the banking business in Ethiopia is booming and as a result, the number of banks is increasing as time passes. With the increasing number of banks, the need to regulate their liquidity in particular is of great concern.This very sensitive issue, however, is not being well addressed in the different agenda set to discuss it. Moreover, there are no or only very few literatures on the area.Regulation of banks'' liquidity is a very challenging task and cannot be effectively carried out in a regulatory environment which is poorly equiped interms of human, material resources and modern technology. This book, therefore, closely analyses, inter alia, the concept of liquidity regulation, its rationale, the regulatory modalities set in place and the consequences in case of failure to comply with liquidity requirements and gives a comparative analysis of the law against the practice. The book is a big contribution to the scarce academic discourse in the area and could be useful to bankers, regulators or others having interest in the area.
This study examines transparency and risk reporting issues in Islamic banks. Based on a postal questionnaire survey of 28 Islamic banks in 14 countries, supplemented by a follow-up e mails and interviews, the study addresses the following specific issues on: (a) the nature of risks that Islamic banks are exposed; (b) the risk measurement and management used by Islamic banks; (c) the information required by Islamic bank supervisors to monitor the risk profile of Islamic banks; (d) the importance of transparency and market discipline in Islamic banks; and (e) the adequacy of current risk reporting in Islamic banks. The results of the study indicate that Islamic banks are exposed to similar risks as those in conventional banks. Furthermore, the results also reveal that the degree of the importance of the risks is also similar to those in conventional banks, except the nature of the risks.
The text is designed to cater to the need of the students, as well as the research people of financial management, by giving a good understanding of the subject and its applications. This new edition seeks to enhance the coverage of the book and update it by including new statistical techniques.It makes the book more comprehensive and incorporates the changes that have incurred in the field of finance and management in India as well as the world. The purpose of this book is to clarify concepts in Liquidity, Profitability and Risk management of the particular industry and at the same time relate them to those examples which rendered the text meaningful to the reader. The book has been written for the student as well as the researcher in the field of finance and management, both of whom need to have good understanding of the subject and its applications.
For all countries especially developing countries, banking system is the main component of the financial system.Hence, researchers and regulation authorities have focused on a banking system as a main cause or preventing factor responsible for financial and economic crises. This study presents comprehensive analysis of overall risk level, market risk and how selected variables affect credit risk in the Jordanian banks. This study provides a new theoretical background to understand how an overall level of banks risk and market risk has changed during 1995-2008. It also identifies the variables affecting credit risk in the Jordanian banks.The outcome of this study would increase the understanding and awareness of banks'' management about the adverse effect of credit risk on their profit. Further, it helps the managers to minimize the credit risk level and improve their appropriate lending policies by taking in their consideration the significant variables that are identified by this study. In addition, the results of this study help supervising authorities to ensure that adequate policies and procedures are in place at various banks to minimize risks as far as possible.
Present study deals with operational risks of banks (i.e. as Basel II defines “the risk of loss resulting from inadequate or failed operation of people, systems, and processes or from external events”). The complexity of financial institutions and the regulatory efforts make the analysis of the operational risk necessary. The main message of this book is that institution size has an important effect on operational risk exposure and management. Firstly, a well-behaving stylised stochastic process based approach underpins the applicability of Poisson frequency and fat-tailed loss distributions, however a method built from historical data on a small sample may result in estimation bias. Secondly similarly to the results for other countries the total operational risk losses in a given period are significantly correlated with gross income-based size of banks in Hungary as well, mainly driven by frequency. Finally, it is found that larger institutions are more inclined to use advanced operational risk management methods. This might be a favourable tendency from systemic risk point of view, as institutions with potentially higher system risk tend to apply more conscious risk management.
Having started in the end of 2007, the recent financial crisis forced many banks into bankruptcy and triggered multiple bail-outs as well as the set up of guarantee funds and liquidity injections. One was under the impression of watching ''Domino Day'' with the two differences being that banks were the falling stars of the show and that the plan according to which the banks were supposed to go down was not known even to the people being part of the game. I shed some light on this plan and examine the amount of contagion risk being present in the American and European banking systems. For this purpose, a sample of 15 US and 15 European banks is examined and several extreme value theory techniques are applied. The empirical evidence indicates that the American banking system is more prone to spillover risk than the European banking system. Despite particular cross-Atlantic differences, systemic risk has increased substantially on both continents over time. The evidence provided is calling for regulators'' and bank managers'' attention and action.
This paper analyses the liquidity effect in Norway by examining the relationship between a range of liquidity variables and five different measures of the short-term interbank premium. In a floor system the key policy rate is equal to banks’ deposit rate in the central bank, and as such, this analysis provides new information on the liquidity effect in a floor system. Both excess liquidity (total central bank reserves in the banking system) and structural liquidity (central bank reserves in the system before Norges Banks’ market operations) have, as expected, a negative a significant effect on almost all dependent variables. Furthermore, in periods of financial turmoil European and Norwegian banks may face higher USD rates in the interbank market either because of a general USD liquidity premium or an institution specific credit premium. My analysis provides additional insight in the division between the liquidity premium and the credit premium in a way, to my knowledge, not done in earlier literature. The results indicate that during the financial crisis (2007-2009) the liquidity premium dominated in USD as the availability of credit deteriorated.
A new element of risk, the liquidity risk, has flourished along this time taking importance and playing a key role in risk management tools. This has attracted the attention of the scientific community and financial experts. Therefore, this book provides a theoretical introduction and a state of the art of the key elements needed to understand the complexity of the dealt issue. Mainly it gives a study over liquidy risk and its application in market risk (being included in VaR measure). It also explores a relatively new alternative approach to model the liquidity risk using artificial neural networks, which has been oriented in focused delay and recurrent neural networks due to their capability to work with time series. That analysis should help shed some light on this new environment and should be useful to professionals in finance.
In the wake of the great financial crisis of 2008 the entire industry's practices have come under scrutiny. Everyone from the government to regulators, banks and risk managers are rethinking the best way forward for the financial sector. The stakes are high. Should trends in the industry continue and financial innovations allow the damage of the next crisis to grow exponentially, the endgame could be the sort of mutually assured destruction that topples entire economies. Charting the way forward in financial services reform requires a fundamental reappraisal of how things are done in order to avert disaster in the near future.