Thuyết trình assignment LIQUIDITY AND RESERVE MANAGEMENT STRATEGIES AND POLICIES

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LIQUIDITY & RESERVE MANAGEMENT

STRATEGIES & POLICIES
Phạm Tâm Long
Nguyễn Hữu Bảo
Bùi Việt Anh
Hoàng Phương Quỳnh
Đỗ Khánh Huyền


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CONTENTS

LIQUIDITY RISK

MANAGEMENT OF LIQUIDITY RISK OF BANK


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LIQUIDITY RISK
1. Definition of liquidity of bank
2. Definition of liquidity risk
3. The relationship between liquidity and bank
reserves
4. Reason to happen liquidity risk

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1. DEFINITION OF LIQUIDITY BANK

According to Basel committee on Banking
Supervision

 Liquidity of bank depends on

in the financial market.
 Bank uses model of demand for and
supply of liquidity to determine net
liquidity position at any moment in
time and set the plans to use funds


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2. DEFINITION OF LIQUIDITY RISK

According to Basel committee on
Banking Supervision
The risk that a financial institution
is unable to find sufficient funds to
meet its maturing obligations
without affecting its day-to-day
business operations nor affecting
its financial position.

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3. THE RELATIONSHIP BETWEEN LIQUIDITY AND BANK RESERVES

Short of liquidity





The bank's
reserves will
finance the deficit
in the short term

Liquidity risk

is the type of risk mentioned in Basel
II's minimum capital requirements

Bank reserve
The bank needs to reserve a
premium for this type of risk





Liquidity risk

Needs to be carefully assessed by
the bank and monitored by the
central bank.


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4.1. MODEL OF SUPPLY OF AND
DEMAND FOR LIQUIDITY
SUPPLY OF LIQUIDITY

4. REASON TO
HAPPEN
LIQUIDITY RISK

Definition
is the amount of
have

that already have or going to

in the short period of time for bank in using purpose

This cash flow comes from

Customer’s
deposit

Customer’s loan Borrowing from the
repayment

money market

Sales of assets


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4.1. MODEL OF SUPPLY OF AND
DEMAND FOR LIQUIDITY
DEMAND FOR LIQUIDITY

4. REASON TO
HAPPEN
LIQUIDITY RISK

Definition
is the demand for

out of bank in different time

This demand is depend on these
elements

Demand for Credit request
withdrawing
from
the money
customers
of customers

Repayment of
nondeposit
borrowing

Interest
expenses

Payment of
stockholder
cash dividends


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4.2 THE REASON OF HAPPEN
LIQUIDITY RISK
SUBJECTIVE REASON

4. REASON TO
HAPPEN
LIQUIDITY RISK

1. Due to the maturity of asset and liability are
disproportionate
2. Risk of imbalance in asset structure
3. Customer structure is not reasonable
4. Because banks are pursuing profit targets in short
term
5. Because banks do not estimate the need of
withdrawals or obligations to pay

6. As the financial capacity of banks is limited
7. Due to the multiple currency trading, it is created
the liquidity risk and financing requests each currency
8. Due to the reduced of bank’s prestige, the
depositors quickly withdraw the deposit causing the
liquidity risk


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4.2 THE REASON OF HAPPEN
LIQUIDITY RISK
OBJECTIVE REASON

4. REASON TO
HAPPEN
LIQUIDITY RISK

1. Financial assets are susceptible to fluctuations of
interest rates
2. Monetary policy of the central bank
3. Legal framework of operational safety in credit
institutions system
4. Due to the customer's business cycle
5. Due to the special characteristics of the cycle
business
6. Due to economic crisis or financial crisis
7. Due to rumors

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Management of liquidity risk of bank
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1.Signals from the marketplace
2.How to prevent liquidity risk
3.Control the status of liquidity of banks
4. The way to surmount deficit of net liquidity position


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Part I

SIGNALS FROM THE MARKETPLACE

Public Confidence

Stock Price Behavior

Risk Premiums on
CDs and other
borrowings





Loss Sales of Assets

Meeting Commitments to
Creditors









Borrowings from the Central
Bank


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2.1. Estimating liquidity needs

METHOD 1: The sources and uses of funds approach

There are two way to
estimate loans and
deposits at a given
liquidity planning period

HOW TO
PREVENT
LIQUIDITY RISK

Step 1
Loans and deposits must be forecast for a given liquidity planning
period.

Step 2
The estimated change in loans and deposits must be calculated for
the same period

Step 3
The liquidity manager must estimate the net liquid fund’s status for
planning period by comparing the estimated change in loans to
estimated change in deposits


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AT THE FIRST STEP


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2.1. Estimating liquidity needs

METHOD 1: The sources and uses of funds approach

HOW TO
Calculate
the change in
PREVENT

expectation in planning
LIQUIDITY
RISK
period

Step 1
Loans and deposits must be forecast for a given liquidity planning
period.

Step 2
The estimated change in loans and deposits must be calculated for
the same period

Step 3
The liquidity manager must estimate the net liquid fund’s status for
planning period by comparing the estimated change in loans to
estimated change in deposits


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AT THE SECOND STEP


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2.1. Estimating liquidity needs

METHOD 1: The sources and uses of funds approach

HOW TO
PREVENT
LIQUIDITY RISK
Determine the net
liquidity position

Step 1
Loans and deposits must be forecast for a given liquidity planning
period.

Step 2
The estimated change in loans and deposits must be calculated for
the same period

Step 3
The liquidity manager must estimate the net liquid fund’s status for
planning period by comparing the estimated change in loans to
estimated change in deposits


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AT THE THIRD STEP


2.1. Estimating liquidity needs
METHOD 2: The structure of funds approach

Step 1
Divide fund into 3 group depend on the ability of withdrawal

HOW TO
PREVENT
LIQUIDITY RISK

Step 2
Determine reserve for liquidity of each group

Step 3
Estimated liability liquidity reserve

Step 4
Estimate liquidity for increase the maximum of credit
operation

Step 5

Estimate total liquidity requirement

Step 6
Bank use stress testing to make many scripts with many ability
happen so as to estimate demand for liquidity of each script

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2.1. Estimating liquidity needs

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HOW TO
PREVENT
Bankasset
can calculate
indicators
of liquidity to estimate
A. Indicators about
of balance
sheet
their liquidity needs, and compare with other bank in
1. Cash
position indicatorRISK
: cash and deposit due
from system
depository
institutions
LIQUIDITY
banking
to adjust
for / total assets
=> This high indicatorB.
reflects
good liquidity
for bank,
but cash and
in other
depository institutions
Indicators
about
liability

of deposit
balance
sheet
METHOD 3: Liquidity indicator approach

are unprofitable money, so bank should maintain this indicator at a reasonable level, both profit and liquidity

C. Indicators about both liabilities and assets of balance sheet
2. Liquidity securities indicator:

- Core depositsecurities/
ratio: Coretotal
deposits/
-Government
assets total assets
=> Core deposits
are are
primarily
small checking
and
savingsliquidity
accounts
that are
considered
unlikely
to the for
-Government
bonds
free-default
risk bonds,

highest
in each
country
and take
the interest
withdrawn in short term
bank.
=> Bank
High ratio
suggests
lower
liquidity
requirements
for bank.liquidity risk, special the economy has bad debt
=>
should
maintan
thisratio:
high indicator
as to prevent
- Deposit
composition
demandsodeposits/
time deposits

=>
This
ratioratio:
measures how stable a funding base each institution possesses.
- Hot

money
=>
A decline
suggestsheld
greater
deposit
stability
and lesser
need forsecurities
liquidity+ Fed funds loans +
(cash
and due ratio
from deposits
at other
depository
institutions
+ short-term
3.
Capacity
ratio:
Net loans and
leases/
reserve
purchase
agreements)/
(CDs
+ Fed total
fund assets
borrowing + repurchase agreement + Eurocurrency deposit)

=> The
ratio tend tobetween
decreaseassets
the liquidity
for banks
because
net loans
andorleases
are assets
illiquid of
This high
ratiocapacity
reflects relationship
and liability
of bank
in money
market
sensitive
assets.
and sensitive liability of bank.
=> The high ratio reflects bank has enough assets that can be sold to meet the need to withdraw funds from
money market


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2.2. Principle of management and
supervisor of liquidity risk
“Principles for sound liquidity risk management &
supervision” of Basel committee to guide banks on

risk management. 17 principles belonging to groups:

HOW TO
PREVENT
LIQUIDITY RISK

Governance of liquidity risk
management
Bank must have model apparatus for liquidity risk, and the senior
management of bank should develop a strategy, policies and
practices to manage liquidity risk

Measurement and management of
liquidity
risk
Bank should have
model to estimate liquidity risk and conduct
stress tests on a regular basis for variety of short-term and longterm so as to identify sources of potential liquidity strain

Public disclosure
The role of supervisors


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2.3. Prevent liquidity risk
Liquidity risk management model

HOW TO
PREVENT

LIQUIDITY RISK

About the risk management structure
-There are 3 main elements
-The frame
-The infrastructure
-The risk management steps


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

Control round 1: Branches where direct business and
risk exposure will be in the first round of control on
the management of business plan formulation and
implementation, capital balance and usage





Control round 2: ALCO department coordinates with the
Liquidity risk management department of the Risk
management unit which is responsible for building the
system, rules, procedures, guidelines for liquidity
management; construct , Propose setting limits, monitor
and control the liquidity of units in round 1 and
independently report liquidity condition to the board
Control Round 3: The internal audit department is

responsible for periodically and irregularly inspecting
and supervising the implementation of liquidity
management to ensure full and effective implementation
of the two rounds above


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3.Control the status of liquidity of banks
Từ 3060

Từ 6190

Từ 90180

Từ
>181

Các luồng 1.50 1.400
tiền cộng 0
1.250
dồn

-1.600

-1.500

1.000

2.000

Dự trữ
3.03 4.030 3.830
vốn khả
0
dụng cộng
dồn (+)

3.830

3.530

3.500

3.500

Hạn mức

1.50 1500 2.000
0

500

0

300

1.200

Gap cộng

dồn

4.53 2.780 5.230
0

2.230

2.030

4.500

5.500

“Lớp
đệm"
cộng dồn

3.03 1.280 3.230
0

1.730

2.030

4.200

4.300

 

T+1

T+2

T+3
đến15

To control the liquidity of banks, we set up a
process to manage liquidity risk. The general
procedure for managing the liquidity risk of a
commercial bank can be described in this figure

Step 1: Set the maturity ladder
Step 2: Create/Write liquidity report

The daily liquidity report of the
BANK is scheduled for a period
of time


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4. The way to surmount deficit of net liquidity position

The bank needs to understand that the amount of capital held for
liquidity is a source of unprofitable capital and even if the bank holds
a certain amount of capital to cover liquidity risk, a market shock can
cause the bank to use up all that capital to offset the liquidity
Bank should have strategies for liquidity managers from manager
asset and liability of itself instead of a holding amount of capital for

the liquidity risk because liquidity risk will affect assets and
liabilities first