liquidity risks

As well as presenting and drawing attention to proposals which could serve as means of addressing challenges presented by liquidity risks, Part I of the paper concludes with the result that market based regulation is an essential and vital tool in the Basel Committee's efforts to address some of the challenges presented by liquidity risks. The present paper highlights the Basel Committee's acknowledgement of this conclusion. Furthermore, it draws attention to other areas which are considered to constitute fertile substrates for purposes of future research.

In this paper, we have developed a new practical TCF model of OPS by considering not only the proportional transaction costs but liquidity risks which is quantified by LOB data as well. The proposed OPS is much more practical compared to previous TCF models (Kozat and Singer 2011, Cover 1991, Gy¨ orfi and Vajda 2008) as it relaxes the unlimited liquidity assumption. Based on reslults of the backtesting, the proposed OPS method shows its superiority to the existing method (Gy¨ orfi and Vajda 2008) for large-sized funds with low TC rates.

In the well-established literature of market microstructure, turnover in financial assets, i.e. measure of liquidity level, is shown to be inversely related to transaction costs as high trading costs cause investors to trade less (see Bekaert et al., 2007; Levine and Zervos, 1998a,b). As such, to measure the relative liquidity risks/trading costs of different FXD markets we use the FXD trading figures of the BIS as reported in their 2013 TCBS report. TCBS offers a unique and comprehensive report of OTC FX and FXD trading throughout the world at high levels of granularity and activity. It reports the average daily turnover figures (during the month of April) for the years 2001, 2004, 2007, 2010 and 2013. TCBS (2013, page 17) reports that turnover data provides a measure of market activity, and acts as a proxy for market liquidity. TCBS (2013) define turnover as the gross value of all deals entered into during a given period, and is measured in terms of the nominal or notional amount of the contracts. The data are collected over a one-month period, i.e. during the month of April, to mitigate the possibility of short-term variations in trading activity that may contaminate the data. For the purpose of cross-country comparison, the daily turnover averages are computed by scaling aggregate monthly turnover figure for the country in

anks perform maturity transformation and insure public’s liquidity needs, but in process become exposed to liquidity risk (Diamond and Dybvig, 1983). When renouncing frictions prevent a solvent bank from covering a liquidity shortage, it may go bankrupt despite having valuable long-term assets. Most recent bank liquidity events in developed countries were associated with increased solvency concerns. Global scanning and the effect of globalization has had a significant impact on all types of business entities and their activities have become global by nature, thereby affecting the greater part of economic life (ohmac,1990, Barnet and Cavanagh,1994, Brecher Costello,1994). Due to globalization of banking business, banks are new exposed to diversified and complex risks. As a result, effective management of such risks has been core aspects of establishing good governance in banking in order to ensure sustainable performance. Risks are usually defined by the adverse impact on profitability of several distinct sources of uncertainty, while the types and degree of risks an organization may be exposed to depend upon a number of factors such as its size, complexity of business activities, volume etc. In banking sector regular and prime activities are the management of risks. Bank accept risks in order to earn profit, they must make a comprehensive balance alternative strategies in terms of their risks characteristics with the goal of maximizing shareholders wealth. In doing so, banks recognize that there are different types of risks and that the impact of a particulars investment policy. In recognition of the importance of an effective risks management system and policies Bangladesh Bank as guardian of all financial institutions has issued guidelines on managing core risks in banking sector. Generally the core risks are categories into five broad classes such as, credit risks, assets and liability or balance sheet risks, foreign exchange risks, liquidity risks, and money laundering risks. The core risks and benefits of globalization distributed unevenly developing countries facing tremendous difficulties in meeting the challenge globalization, according to the literature, which suggested that the current process of globalization is unsustainable for us in the long run unless we introduce new ways and dynamic policies able to govern it (Tisdell, 2001). In responding the core risks in the banking sector and meet its obligation and commitment as they fall due commercial bank have been made the strengthen structure for liquidity risks management. To survive, a bank must be able to support itself with own funds for the duration of liquidity stress, and/or alleviate the markets concerns over its solvency to regain access to funds as soon as possible.

Mwangi (2014) carried out an investigation whose main objective was to ascertain the influence of liquidity risk management on bank performance in the context of Kenya. A descriptive research design was adopted with the target population being the commercial banks listed as at 31December 2013.Secondary data was obtained from published accounts of commercial banks which included income statement, statement of financial position and other disclosures between 2010 and 2013. A regression model was developed with bank performance being measured using the ROA whereas the independent variables were: liquid assets to total deposits, liquid assets to total assets, balances due to other banks /total assets and asset quality. The research findings showed that liquidity had a significant negative relationship with commercial bank performance. The study further suggested that holding more liquid assets as compared to total assets would lead to lower returns to commercial banks but the effect was not significant at 5%, holding more liquid assets as compared to total deposits would bring about lower returns for commercial banks.

Art 420-424 CRR state specific outflow-rates for each outflow-(sub)-class. As a general premise, the LCR privileges outflows to entities not involved in professional financial business (e.g. retail, SME; Art 421 CRR) or outflows in connection with a specific established relationship or increased service dependence (e.g. clearing, custody or cash management; Art 422 para 3 point a, point c CRR). For example, most liquidity outflows to re- tail clients have run-off-factors of 0, 5 or 10% (Art 421 para 1 and 5 CRR). Liquidity run-off to non-financial wholesale clients are weighted with 40% (art 422 para 5 CRR), while outflows to financial institutions are set with up to 100% (e.g. unsecured lending; Art 422 para 2 point b CRR).Concerning the minimum reserve within IPS (see 6.2.3), the LCR consequently assumes a 100%-outflow from the central institution to the deposit plac- ing members of the IPS (Art 422 para 3 CRR). Given that HQLA always must be freely available, the run-off- factor of 100% is feasible in order to sufficiently reflect the nature of the interbank deposit as highly liquid on the liability side. In cases where deposit placing institutions do not report their respective deposits as HQLA, the central institution only has to suffer a 25% outflow-factor. From the deposit placing IPS-member, the interbank deposit do neither count as HQLA nor as inflow according to Art 425 CRR (asymmetrical treatment).

Liquidity and credit risks are positively related and jointly contribute to bank volatility. In a recent study, based on a sample of 49 banks in the MENA region from 2006 to 2013, Ghenimi A. et al. (2017) examined the main sources of bank fragility. Their analysis is based on the relationship between credit risk and liquidity risk and their impact on bank stability. In a note from the Basel Committee on Banking Supervision (2016), good corporate governance for banking organizations increases the effectiveness of risk management, thereby increasing the financial strength of these entities. In order to assess the progress made by the banking sector in the area of risk governance, the Financial Stability Board (FSB) published a thematic analysis on governance in February 2013. Such analysis encourages financial institutions and national authorities to take steps to improve risk governance. In general, banks deliberately take the financial risk to generate revenue and serve their customers, resulting in asymmetric information. However, good internal governance of banks is essential, forcing boards to focus more on risk assessment, management and mitigation. Hence our problem is presented as follows: What is the impact of the governance mechanisms of characteristics of the board of directors and ownership structure on the risks of Tunisian banks, which continue to occupy a leading position in the financing of the economy?

This paper was motivated by observing that the liquidity risk management actions of financial intermediaries spilled over to asset markets during the subprime crisis which started in 2007. The next step was to incorporate the term spread in the analysis which can be regarded as a natural measure of the marginal profitability of bank liquidity transformation and the incentive for funding liquidity risk-taking of banks. The goal of this paper was then to empirically test if a unification of the term spread and the liquidity risk cycle of the banking system into a financial fragility indicator can time a certain point (in this paper: the peak phase) of the asset price cycle. It was found that the financial fragility indicator predicted all major equity market downturns for Germany over the past 37 years. Moreover, 80% of the equity market peaks were followed by peaks in economic activity. Therefore, if a policymaker observes a fragility signal and the formation of an equity market peak, the probability for an economic recession is very high. In this context, future research may investigate whether monetary policy needs to account for financial stability, given that liquidity transformation has financial and real effects. Moreover, it would be interesting to analyze the usability of liquidity transformation and the resulting funding liquidity risks of banks within the monetary analysis process and comparing its performance to standard money and credit aggregates.

Findings: The risks in Commercial and Islamic banks are similar many of them in (risk of theft and loss, cybercrime risk), and also a lot of difference, especially with regard to interest rate risk in classical banks without Islamic banks as well as risks related to financing. Also, Profit in Commercial banks is interest paid on deposits and interest received from loans - Islamic banks (Profit is realized from work and profit Halal). Islamic banks suffer from high liquidity risks, which increases the opportunity cost of using these funds more than Commercial banks. Despite the possibilities and modern methods used by conventional banks in risk management and hedging, they are more vulnerable than Islamic banks. Because the Islamic banks' style of participation enabled them to choose sound projects that avoid them from taking risks.

It is well-known that the risk of financial institutions (here we refer to banks for simplicity) comes in many types. For example, it takes the form of credit, liquidity, interest-rate, solvency and operational risk. Banks assume all types of risk to make profits. Yet, a bank that undertakes too much risk of any type can become insolvent and fail. For example, high credit and liquidity risks typically manifest themselves through mismatched maturities and durations between assets and liabilities. Also, high operational risk appears when costs are significantly related to bank output. Banks ultimately fail because they cannot generate liquid assets to meet deposit withdrawals, and they operate with insufficient capital to absorb losses if they were forced to liquidate assets. Therefore, a measure of overall bank risk should encompass the features of the various bank risks in one box. For various reasons this box remains somewhat black in the bank-risk literature. In this section, we discuss the theoretical underpinnings of several measures of risk currently used by researchers and regulators.

Similarly, before developing the work, research about studies that were related to the main objective was done. One might mention at this point the study by Ávila Bustos (2005), in the city of Bogotá, called Measurement and control of financial risks of companies in the real sector. The author believes that there are three types of financial risks in organizations known as market risks, credit risks and liquidity risks, and he develops for each asides on management, administration and measurement, being these risks classically described by authors such as Markowitz, Miller and Sharpe (1990), also retaken by Tudela and Young (2005) ie not articulated for an integral analysis, but for an individual perspective of them. An important aspect of this study is that it recognizes the need for risk measurement in organizations; moreover it deepens the research on management and administration of the same one; to the extent that is considered to be a complementary element to the development of the corporate purpose of the organizations. In this context, Zorrilla (2003) also conducted a study in the city of Veracruz (Mexico) on financial risk management of exportation SMEs in contributions to the economy, which aims to provide guidance and show the entrepreneurs the importance of using derivative financial instruments such as “forwards", "futures", options, “swaps", to achieve the reduction in market risks. This work focuses on these derivative financial instruments, for their ability to mitigate or reduce the risks faced by SMEs. Another study, is the one made by Navarro and Lopez (2009) from the University of Sevilla, this is a proposal for simplified model risk detection in companies: empirical study applied to the construction sector (SMEs).

During all of these upsurges, liquidity risks in the three di¤erent currencies behaved broadly similarly to one another. However, there are many minor di¤erences in their behavior (which presumably accounts for why models with fewer than three liquidity factors performed poorly in Table 1). One notable di¤erence is that the EUR liquidity risk exhibited a fourth upsurge in May and June 2008 which does not appear in the USD and GBP liquidity risks. Furthermore, as noted above, after the August 2007 increase in liquidity risk (common to all currencies), liquidity risk remained high in the EUR market well after it declined in the other currencies.

This is the first paper to examine the impact of competition on the various risks (i.e., default, market, asset, capital and liquidity risks) faced by Indian scheduled commercial banks (SCBs). Following Anzoategui et al (2010), we consider a non-structural measure of competition viz. Panzar-Rosse (1987) H-Statistic and following Liu et al (2010), several structural measures of market power viz. 5-bank concentration ratios (based on loans, deposits and assets) and the Hirfindahl-Hirschmann Index (HHI). We also take into account the effects of other bank specific and macroeconomic controls such as return on assets (ROA), size and the annual GDP growth rate. The risk and concentration/ competition measures along with control variables are explained in greater detail in Section 3. The study spans the period 1999-2000 to 2012-2013 and uses an unbalanced panel data set consisting of 756 observations. Our results show that increased competition leads to higher stability when related to default, market and asset risks. However, competition adversely affects capital and liquidity risks, thus lowering stability. This mixed evidence has interesting policy implications as discussed in the concluding section.

Another study was conducted to analyse the liquidity risk and as well as to draw the relationship between the liquidity risks and financial performance and measured by using Return on Assets (ROA) and return of equity (ROE) of Islamic banks is analysed by Ariffin, N. M. (2012). This study also is to determine the liquidity risks and financial performance give impact of the global financial crisis on the Islamic banks. From findings of this study, it finds that the global financial crisis give impact on extent of liquidity risk and financial performance of Islamic bank from the analysis of correlations.

Financial performance is measured by how better investors and shareholders are at the end of the period than they were at the start. It is usually determined by using ratios from statements that is statement of comprehensive income and financial position as well as data on securities prices .The results enables the firms to compare based on the previous periods and compare with other firms of similar business (Graca, Barry &Doney 2015).This study assessed intends to assess liquidity, credit ,Interest rate risk and Foreign exchange risks as independent variables and how they influence financial performance of commercial banks. Liquidity risks involve lack of enough securities that can easily be converted to liquid that is desirable by investors in the bank. Its inadequacy will mean loss of sales hence affecting the profitability of the firm. Market risk involves high interest rate among others which will cause investors to look for alternative products hence reducing loan portfolio sales. Credit risk affects the financial performance when the firm has many nonperforming loans that do not have guarantors or securities for the company hence lowers the financial performance of the firm. Financial performance is the indicator of how healthy the organization is in terms of profitability, asset base and the number of branches the organization has.

Harris (1987) incorporated both liquidity and information effects and found an inverse relationship between transaction price volatility and liquidity. However, liquidity was not measured directly by the BAS but by a set of hypothesized explanatory variables. In addition, using direct estimates of the BAS, Wang and al. (1994), examined the intraday relationship of BASs and price volatility in the S & P500 index futures market and controlled for information and liquidity effects. They found that BASs and intraday price volatility are jointly determined and positively related. As we review the existing literature and empirical evidence to date the major financial markets microstructure determinants namely TV, BAS and the IV, are jointly determined.

One is an instrumental approach that seeks to define an objective method of risk assessment. The other is a non-instrumental approach in which the subjective perception of the borrowers by the financial analyst, and the holding of specific information gathered through informal sources, are attributed to the deciding factors in loan decision-making. Nevertheless, banks sometimes evaluate loans risks by using a credit scoring method. They use historical data and statistical techniques (Mirta & Zekic-Susac 2005). Credit scoring tries to isolate the effects of various applicant characteristics in delinquencies and defaults (Saunders 1997). Consequently, credit scoring is already allowing large banks to expand into small business lending, a market in which they have tended to be less active. Scoring is also an important step in making the securitisation of small business loans more feasible. Further, Mester (1997) notes that credit scoring has some obvious benefits that lead to its increasing use in loan evaluation; for example, greatly reduced time is needed in the loan approval process. However, while no scoring model can prevent all types of errors, Berger and DeYoung (1996) noticed that a good model should be able to accurately predict the average performance of loans made to groups or individuals as long as the model is relevant to credit quality.

This paper examines whether implicit or explicit deposit insurance encourages bank risk-taking in emerging markets dominated Asia. Testing the data set of 401 banks in 31 Asian countries over the period from 2000 to 2010 with three risk proxies for bank risk-taking- credit, liquidity, and overall default risks, we find that the implementation of deposit insurance helps to stabilize the banking system but also leads banks to undertake excessive risk. Risk-taking incentives vary with bank size and risks. Differentiated premiums may not accurately reflect the level of risk that a bank poses. We also find that higher deposit insurance coverage significantly encourages banks’ risk-taking. During the presence of a deposit insurance scheme, the pattern of the non-linear relationship between bank size and risk-taking becomes convex. In addition, our results suggest that market discipline exercised by banks is stronger in the presence of mandatory deposit insurance scheme. Government-funded deposit insurance funds allow Asian banks to take a higher risk.

Excess liquidity (defined as all kinds of commercial bank deposits held by the Eurosystem minus the minimum reserve requirements) in the euro area exceeded €1,900 billion, or 17 percent of euro-area GDP, in September 2018. Holding such excess liquidity is costly for commercial banks, given that the currently negative (-0.4 percent) deposit facility interest rate applies on excess liquidity holdings. The current stock of excess liquidity implies an annual €7.6 billion cost in total for those banks that hold this liquidity. More generally, the European Central Bank’s negative deposit interest rate and asset purchases further reduced market interest rates, with a negative impact on banks’ net interest income and thus profitability. This could incentivise a reach-for-yield race among banks. Additionally, the access to liquidity eased significantly and removed the liquidity constraint for most banks’ lending activities. These factors might incentivise banks to engage in risky lending in order to improve their profits. This in turn might create financial stability risks.

Published By ratio, liquid ratio, various turnover ratios, return on assets, return on equity, profit margin etc. I have also used various tables to present my calculation. It also used bar diagram with time series to conduct my study. I have used data in diagram from table. Again, I have used a calculator to determine the ratios by maintaining the required formulas. Required quantitative information has been taken from annual report of Beximco pharmaceuticals. The samples had been randomly selected and make a significant relationship between liquidity and profitability of the pharmaceutical.