Bank liquidity: concept, analysis, management. Liquidity ratios

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

This world is unstable and constantly changing. So you want to be sure of something, but it doesn’t always work out the way you want. Some problems cannot be insured. Others can be seen even in the distant approaches and appropriate decisions can be made to minimize their impact. One such case is bank liquidity.

General information

Start with terminology. The liquidity of a commercial bank is the ability to fulfill the obligations assumed to its customers without loss and in a timely manner. They can be conditional and real. In the first case, these are liabilities that are displayed on off-balance accounts. They arise under certain circumstances - for example, with a guarantee. Real liabilities are deposits, attracted interbank loans and issued securities. A very good concept of this is given by international financial reporting standards. According to them, contingent and real obligations arise from transactions in which any contracts are used that entailthe creation of a monetary asset of one enterprise and an instrument of capital of another. What matters in this case? Initially, it is necessary to remember about liquidity factors. They need to be analyzed in order to be able to manage. And liquidity ratios are already used as residual data. There are quite a few of them, but attention will be paid only to the main points.

About factors

They are internal and external. The first include:

1. Asset quality. This is the most important point that can be studied by an outside observer. There are five risk groups. Each of them is assigned a certain coefficient, which ranges from 0 to 100 percent. It shows how much of the category and available assets can be lost.
2. Bank management and reputation.
3. Quality of Raised Funds,
4. Association of liabilities and assets by maturity.

Additionally, it is necessary to remember a strong capital base. That is, how much, as a percentage of the total value of assets, is occupied by own funds. They can be the statutory fund, as well as other formations that are used for certain purposes, the most important of which is to ensure the financial stability of the commercial structure. The larger the equity capital, the higher the bank's liquidity. Now about external factors:

1. The general economic and political situation in the country. This creates the prerequisites for the development and successfulfunctioning of the banking system and provides a stable basis for growth. Without this, it is not possible to create a stable deposit base, improve the quality of assets, improve the management system and make profitable operations.
2. Refinancing system by the Central Bank. It often happens that the market develops faster than free cash appears. To support the economy and the activities of financial structures, a refinancing policy is being pursued, when resources can be replenished with the help of the Central Bank.
3. The effectiveness of the oversight functions carried out by the main regulator.
4. The level of development of the interbank market and work with securities. This factor makes it possible to ensure the availability of an optimal system for working with liquid funds without loss of profitability. In this case, the assets (thanks to the stock market) can be quickly turned into money.

What is liquidity management?

Bank liquidity management is closely related to the balance sheet. To maintain liquidity, it is necessary to constantly keep a sufficient amount of funds in correspondent accounts, in cash desks and in the form of marketable assets. The focus is on:

1. Analysis of current, instant and long-term liquidity.
2. Determine the need of a financial institution for funds.
3. Compiling short-term forecasts.
4. The analysis of liquidity and the use of negativemarket development scenario (situation with the market, position of creditors and borrowers).
5. Fixing the maximum indicators for liquidity ratios in general for currencies and for each of them separately.
6. Assessing the impact on the general situation of operations that are carried out in foreign currency.
7. Determining the deficit / excess liquidity and setting the maximum allowable values.

It must be admitted that assessing the liquidity (and solvency) of a bank is one of the most difficult tasks. But if it is solved, then we can say whether he can fulfill his obligations. This is influenced by changes in the resource base, the characteristics of its condition, the return of assets, the size of equity capital, the quality of management and the financial result of activities. Each of these components at a certain point in time can play a decisive role. In order to control the state of the financial institution, the following bank liquidity ratios were established: instant, current and long-term. They are defined as the ratio of assets and liabilities, which take into account the terms, amounts, types of assets and a number of other factors. What are they and how are they calculated? Considering the formulas will help us with this.

What are the regulations?

Let's go from small to great. First, you need to remember about the instant liquidity ratio. It is used to adjust the risk of the bank losing control over the situation within one business day. It is necessary to determine the minimum ratio of the sumhighly liquid assets to liabilities on demand accounts. It is calculated according to the following formula: VA / OD100 ≧ 15%. Now let's look at the notation. VA are highly liquid assets. That is, this is what you can get in the next day. They can be claimed if you need to urgently and immediately receive funds. OD - demand obligations (liabilities). According to them, the depositor or creditor may demand immediate repayment. This indicator is calculated as the sum of balances on demand accounts. But at the same time, certain adjustments are made - in accordance with the instructions of the Bank of Russia. The minimum value in this case is 50%. The current liquidity ratio is necessary to limit the risk of loss of solvency during the next thirty days to the date of calculation. It determines the required minimum ratio of the amount of assets to liabilities that are on demand accounts, and also end in the next thirty days. The formula in this case is similar: VA/OD100 ≧ 50%. But there is one small nuance here (except for fifty percent). Only those bank assets that (according to the documentation of the Bank of Russia) belong to the first and second quality categories can be considered as objects. In addition to them, balances on balance accounts are taken into account, for which it is not necessary to form reserves, as well as what will be returned and received in the next thirty days.

What else?

And when considering the concept of bank liquidity, we still have one important point. Namely, long-term work. Here we have to meet with the norm of long-term liquidity. It regulates the possibility of losses on the part of the bank when placing funds in long-term assets, when the issue of repayment of claims whose term exceeds 365 or 366 calendar days is determined. This takes into account the equity capital of the bank and all its liabilities, despite the fact that they have a maturity date of more than one year. Here the formula is slightly different: CT / (K + OB)100 ≦ 120%. Here, CTs are credit claims that have a maturity of more than 365 or 366 days. K - the capital of the bank, and OB - the obligations of the financial institution for loans and deposits that were received by it. The maximum allowable value in this case is set at 120 percent. Regulations are good. But something more is needed. For example, specific bank liquidity indicators. Or even their whole system, thanks to which, in a complex, it will be possible to assess the state of a financial institution both at the current time and in the medium term. And that's what ratios are for. But how do you get them? It is also necessary to correctly interpret in order to make the necessary, adequate and effective decisions. In this case, an analysis of the current situation will help. What needs to be done and how?

General theory on analysis

Most of the methods that study the factors affecting the bank's liquidity are based on the following stages:

1. Assessment of the financial condition in terms of solvency. It is checked to what extent the real state of affairs allowstimely and in full to ensure the fulfillment of the obligations assumed. It is necessary to prevent and eliminate the occurrence of shortcomings and excess liquidity. In the first case, the insolvency of the financial structure may occur, while in the second, profitability will be under attack. This stage is necessary to determine the initial base - identifies the main problems and determines general trends and prospects for improvement.
2. Analysis of factors that affect liquidity. At this stage, it is necessary to take into account the impact of multidirectional groups of factors on the bank's policy. And in particular - on its liquidity. When negative trends are studied, it is necessary to identify the main reasons that caused their appearance, analyze their impact and develop recommendations to prevent negative consequences. First of all, we are talking about macroeconomic factors. This is the effectiveness of state regulation, control, the economic and political situation in the country and / or region, and the like. At the micro level, the following are important: the quality of management, the size (especially sufficiency) of equity capital, the stability and quality of the resource base, the degree of dependence on external sources, the riskiness of assets, structure, profitability and diversification. In addition, off-balance sheet operations also have a certain impact.
3. Structural analysis, as well as assessment of the effectiveness of asset and liability management.
4. Research on liquidity ratios.

The last two points deserve special consideration.

Prostructural analysis of the bank's liquidity and assessment

In general, the solvency of any financial institution is based on maintaining a certain ratio between the individual components: equity capital, attracted funds and placed money. In order to avoid problems (or at least minimize the likelihood of their occurrence), analysis, control and management are necessary. And all this is included in the third stage. Initially, it is necessary to make sure that there is such a balance structure, when assets do not lose their price and are modified in time on demand.

It is also necessary to pay attention to the dynamics of the volume of transactions and reflect them in the form of asset / liability transformation. In this case, the proportion of specific groups and species is determined. Before you start working with them, you need to clear the data from the re-count. That is, subtract items that only nominally increase assets as well as liabilities (eg losses, depreciation, use of profits). This is what structural analysis is all about.

It is necessary to determine the share of each group in the total net balance. At the same time, their weight in the actual volume of transactions carried out is studied and the following main groups are formed: own obligations, on demand, urgent and other liabilities. Their analysis will allow you to get a general idea of the resource base with which you have to work. This reflects the quantitative and qualitative characteristics. But still, assets provide the greatest interest. They must be sufficient, and their structure -meet liquidity requirements. Therefore, all assets are divided into groups, after which their share is estimated. In total, they distinguish: highly liquid assets, available funds, long-term, non-realizable. Their structure may change depending on what obligations need to be secured.

Research on liquidity ratios

And we are approaching the final moments. The data obtained at this stage are taken into account in short-term recommendations for maintaining the liquidity of the bank's balance sheet. Although they can also be used in the development of a global strategy for a financial institution. So, the liquidity ratios that are obtained during data processing are divided into two main groups:

1. Regulations. We have reviewed them before. It should only be noted that they are established by the Central Bank and are binding on all commercial structures operating in the sphere of their supervision.
2. Estimated odds. They can be developed by specialized companies or by the analytical service of the bank. Their meanings are not mandatory. The main purpose is to obtain better and more complete information about the bank's liquidity.

It should be noted that the coefficient analysis method has not only advantages, but also disadvantages. The latter include the juggling of information, manipulation of data, the use of various tools that make it possible to present the situation in a more favorable light. What is better to use to assess the liquidity of a commercial bank?

Useadditional tools

This is turning into a problem for the analytics service. Used:

1. Settlement documents that were not paid on time due to lack of funds in correspondent accounts. This indicates that there are problems. Off-balance accounts 90903 and 90904 are used as reference points. If the balances on them have a growth trend for a long time, then the bank will recognize.
2. The level of business activity. It is the ratio of turnover on cash and correspondent accounts to the net asset balance. It is used to assess the overall level of business activity and the impact of accepted risks on the sustainable functioning of a financial institution. If it decreases, then this indicates a reduction in operations and curtailment of activities. The reasons for this scenario may be low quality assets. A value greater than one is considered normal.
3. Ratio of liquid and net positions. Allows you to assess how actively loans are taken to cover the deficit. If it is less than one, then this indicates problems.
4. Coefficient of the current balance of liabilities and assets. Used to assess the likelihood of problems occurring. If it is greater than one, then this option is practically excluded. If it is below 0.6 and goes down, then a liquidity shortage is expected.
5. Medium-term balance ratio. Similar to the previous one. But the term for it is 180 days. Used to manage both for the future and for a specific date.

Conclusion

What a broad topic. Considering something, the volume of the book is almost always necessary. Bank assets are no exception to this. A lot of information has been considered. But not all. So, in addition to the coefficient method, the bank's current liquidity can also be serviced by a cash flow management mechanism, which reflects not only liabilities and assets, but also off-balance sheet operations conducted by a credit institution. But it takes a lifetime to learn all the nuances and aspects. New information appears, some data becomes obsolete, loses its uniqueness. Take, for example, the standards set by the Central Bank. Today they are, and in five years it will be decided to raise the bar by five percent. Or now everything is calm in the country, and in a year there will be a severe crisis situation that will literally bring down the economy. It is impossible to accurately foresee and predict everything and everything. The maximum available is simply to increase the likelihood that everything will go well.