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Experience in assessing banks’ liquidity



Category: Concept of the Bank and the Banking System

Liquidity of commercial banks as a qualitative state, that are affected by many factors, it is difficult to measure. This is evidenced by international experience of assessing the liquidity of commercial banks.

Typically, there are two methods of measurement of liquidity:

a) based on financial ratios, calculated on the balance sheets and reflect the liquidity of the balance;

b) by determining the potential need for liquidity, taking into account the analysis turns on assets and liabilities of the bank balance in the respective periods.

Coefficient method involves establishing quantified relationships between balance sheet items. And in some countries, these ratios are prescribed by the authorities, in others — are introduced and supported by the banks themselves.

In the U.S. there is no institutionalized system of measurement from the top of liquidity. Its definition and maintenance is the task of bank management.

Selecting indicators for assessing the liquidity can vary depending on:

market in which the Bank operates:

type or form of the bank;

content and a set of banking operations. However, the Bank’s experience led to the most frequent use of these indicators.

The first group of indicators characterizes the ratio of liquid assets and deposits. It uses two indicators:

1.

Primary reserves (cash + a correspondent account with the Central Bank) / Deposit

2.

Primary + Secondary (government securities) Reserves / Deposits

Through these indicators established a direct relationship between liquid assets and liabilities in the form of deposits to be performed. The level of the first indicator to ensure liquidity of the bank decided to have at least 5-10% the level of the second — at least 15-25%.

The second indicator is used in Japan, but as to which all banks. His level should not be less than 30%.

In the United States to assess the liquidity used several indicators. One is the ratio of the sum of loans and deposits. His assessment is carried out in the dynamics. In this case, the dependence: the more this index exceeds 1, the liquidity of the bank below.

Simultaneously calculated and estimated the proportion of loans in total assets as a reflection of diversified assets. This figure is considered to be optimal at the level within 65-70%.

To estimate the liquidity is also an indicator reflecting the ability of an asset quickly exchanged for cash. It is calculated as the ratio of liquid assets to the total amount of assets. In this case, liquid assets include only balances on hand, cash in transit, on the account, but remnants of the accounts «nostro» in the Central Bank and other banks. The higher this figure, the liquidity is higher, but lower profitability. Therefore, the aim of management in the area of liquidity management is to identify the optimal boundary between bank liquidity and its profitability.

Particular attention is paid to analyze the structure of the involved resources, stable deposit base. In this regard, consider the parameters of the indicators characterizing the quality of the resource base of the bank.

From the standpoint of the stability of deposits are subdivided into the main (stable) and «volatile.» Key deposits — deposits that are entrenched in this bank, do not leave the bank. The more stable deposits, the higher the liquidity of the bank, because they reduce the need for liquid assets.

Major deposits can be as among demand deposits, and among term and savings accounts and deposits. Moreover, experience has shown that the stable part of the deposits is higher among demand deposits.

The reason for this situation lies in the fact that for time and savings deposits is set higher percentage compared to demand deposits, and pay on time and savings deposits are different in different banks. Therefore, these deposits are most exposed to the movement, which determined the name of their «volatile.»

Index characterizing the degree of permanence and stability of deposits, calculated as the ratio of the sum of the major deposits to total deposits. The Bank is considered liquid if the share of the major deposits in total deposits of not less than 75%.

Another indicator that reflects the stability of the deposit base, is the ratio of fixed-term and savings deposits to the total amount of deposits. Time and savings deposits, as noted above, refer to the resources of the bank, more sensitive to interest rate changes. Therefore, increasing the proportion of deposits increases the amount of «volatile» deposits, and hence reduces the liquidity of the bank.

The quality of bank’s resource base is estimated as indicators that the availability of commercial banks to external sources (interbank credit). The formula for its calculation:

Loans received from other banks, including the Central Bank / Amount of funds

The assessment of this indicator is not unambiguous. The possibility of the bank when necessary to quickly bring resources to the interbank market and from the Central Bank at a reasonable fee and thus remove the temporary lack of liquidity seen as a sign of high liquidity of the bank. However, a large proportion of external debt shows weakness and lack of liquidity of the bank. Therefore, further analysis of:

a) The frequency of borrowing;

b) the conditions of borrowing (with collateral or without collateral);

a) the reasons for raising funds;

d) interest on loans.

In many countries, commercial banks’ liquidity ratios are calculated based on the ratio of active and passive balance sheet items, grouped by maturity.

In France, this period is 3 months. Accordingly, the liquidity ratio is calculated as the ratio of assets placed up to three months to demand deposits, time deposits and other resources mobilized for the same period. The calculation of this ratio, commercial banks are required to submit quarterly monitoring bodies. The limiting value of this indicator should not be below 60%.

In England, the commercial banks monthly report to the Bank of England on compliance with the liquidity ratio, which reflects the ratio of cash balances in Nostro, demand deposits and placed for one day, the securities and available-to rediscount bills of exchange — in the numerator and the entire amount borrowed resources — in the denominator. The minimum allowable size of this ratio is 12,5%.

In addition, in England, commercial banks are counting and other liquidity ratios that do not require a report to the Central Bank:

a) The ratio of the amount of assets placed for a period of one month, and the amount of liabilities maturing during the same period:

b) the ratio of assets placed up to 6 months, and the corresponding part of the bank’s liabilities.

In Germany, commercial banks are also monthly reporting to the German Federal Bank on the state of balance sheet liquidity. Law in Germany, the responsibilities of commercial banks to comply with the following relations:

a) short and medium term investments (up to four years) to equal in terms of attracting resources and savings deposits:

b) long-term investments (a term of four years or more) to attract resources for the same period.

The required level of these coefficients in the range of 100% implies, however, the ability to offset the longer-term investments less short-term resources.

Given the dynamism of the state of bank liquidity, foreign experts say that it can not be fully measured by financial ratios, calculated on the basis of balance sheet ratios. Therefore, gradually emerged Practice of liquidity based on cash flow from existing assets and liabilities of the bank.

The difficulty of this assessment is that some financial instruments does not provide advance payment terms (eg demand deposits). Another difficulty is the correct assessment of the prospects for repayment of certain loans.

Therefore, the use of this method involves:

a) the quality and timeliness of information on the timing of payment for assets and liabilities;

b) high quality analysis of the Bank of past and expected trends, the status of loans and deposits.

Widely developed the practice of assessing the liquidity of banks based on cash flow in Japan, the United States and many European countries.

As an example below (Table 6.3) is a technique for estimating the liquidity of commercial banks in Japan.

As for liquidity risk refers to the risk of imbalance on the timing and amounts of liquid assets and liabilities of the bank, it is recommended for groups assets and liabilities up table.

The result of the above comparisons may indicate a shortage or an excess of liquidity, which involves identifying measures to eliminate the risk of imbalance (obtaining new loans in the interbank market, the sale of securities, extension of commitment, etc.).

To assess the liquidity of the bank’s liquidity ratio is calculated per month:

By liquidity = (total demand for funds to secure commitments for the period / Total assets associated with fluctuating interest rate) * 100

Great importance in many foreign countries, given the restriction of large credit risks for banks’ liquidity.

Thus, in the U.S. in the mid-70’s were recognized two indicators: the ratio of loans shall not exceed the bank’s capital by 11 times, or the ratio of loans to capital should not exceed 0.1.

In France, the loan to one borrower, or all borrowers the same group must not exceed 75% of the bank’s own funds.

In Germany, the amount of loans and participation should not exceed the bank’s own funds in more than 18 times. Each of the five largest loans constituting more than 15% of the bank’s own funds shall not exceed the last more than 3 times, and together these five credits must not exceed the bank’s own funds more than 8 times. The largest loan should not exceed 75% of the bank’s own funds.


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