This world is unstable and constantly changing. So I want to be sure of something, but it does not always work out the way I want. Some problems cannot be insured. Others can be seen even at distant approaches and take appropriate decisions to minimize their impact. One such case is the liquidity of a bank.
general information
You need to start with terminology. The liquidity of a commercial bank is a loss-free and timely fulfillment of obligations to its customers. They can be conditional and real. In the first case, these are liabilities that are displayed on off-balance accounts. They arise in certain circumstances - for example, under a guarantee. Real liabilities are deposits, interbank loans and issued securities. A very good idea about 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 entail the creation of a monetary asset of one enterprise and an instrument of capital from another. What matters in this case? Initially, you need to remember about liquidity factors. They need to be analyzed in order to be able to manage. And already, liquidity ratios are used as residual data. There are quite a lot of them, but attention will be paid only to the main points.
About factors
They are internal and external. The first include:
- 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 specific coefficient, which ranges from 0 to 100 percent. It shows how much of the category and available assets may be lost.
- Management and reputation of the bank.
- The quality of funds raised
- The relationship of liabilities and assets by maturity.
In addition, it is necessary to recall a strong capital base. That is, how much, as a percentage of the total value of assets, own funds occupy. They may include a statutory fund, as well as other entities that are used for certain purposes, the most important of which is ensuring the financial stability of a commercial structure. The larger the amount of equity, the higher liquidity the bank has. Now about external factors:
- General economic and political situation in the country. This creates the prerequisites for the development and successful functioning of the banking system and provides a stable basis for growth. Without this, creating a stable deposit base, improving the quality of assets, improving the management system and performing profitable operations is not possible.
- Refinancing system by the Central Bank. It often turns out that the market is developing faster than free cash. In order to support the economy and the activities of financial institutions, a refinancing policy is carried out, when you can replenish resources with the help of the Central Bank.
- The effectiveness of oversight by the main regulatory body.
- The level of development of the interbank market and work with securities. This factor allows you to ensure the availability of an optimal system of working with liquid assets without loss of profitability. In this case, assets (thanks to the stock market) can be quickly turned into money.
What is liquidity management?
Bank liquidity management is closely linked to the balance sheet. In order to maintain liquidity, it is necessary to constantly keep a sufficient amount of funds in correspondent accounts, cash registers and in the form of quick-sale assets. The focus is on:
- Analysis of current, instant and long-term liquidity.
- Determining the financial institution's need for funds.
- Making short-term forecasts.
- Analysis of liquidity and the use of a negative scenario for the development of the market (situation with the market, the situation of lenders and borrowers).
- Fixing maximum indicators for liquidity ratios as a whole for currencies and for each of them separately.
- Assessing the impact on the general situation of transactions that are conducted in foreign currency.
- Determination of liquidity deficit / excess and establishment of maximum permissible values.
It should be recognized 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, characteristics of its condition, return on assets, equity, management quality and financial performance. Each of these components at a certain point in time can play a decisive role. To monitor the condition of a financial institution, the following bank liquidity standards were established: instant, current and long-term. They are defined as the ratio of assets to liabilities, which takes into account the timing, amounts, types of assets and a number of factors. What are they and how are they calculated? This will help us to consider the formulas.
What are the standards?
Let's go from small to great. First you need to remember the instant liquidity ratio. It is used to adjust the risk of the bank losing control over the situation within one operational day. It is necessary to determine the minimum ratio of the sum of highly liquid assets to liabilities on demand accounts. It is calculated by the following formula: VA / OD * 100 ≥ 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 it is necessary to urgently and immediately receive cash. OD - liabilities on demand (liabilities). For them, a depositor or a creditor may be required to immediately repay. This indicator is calculated as the sum of balances on demand accounts. But at the same time, certain adjustments are made - according to 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 over the next thirty days by the calculation date. It determines the necessary minimum ratio 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 / OD * 100 ≥ 50%. But there is one small nuance (except for fifty percent). Only 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.
And what else?
And when considering the concept of bank liquidity, we still have one important point. Namely, long-term work. Here you have to meet the long-term liquidity ratio. 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 for which the term exceeds 365 or 366 calendar days is determined. In this case, the bank’s equity and all its obligations are taken into account, despite the fact that they have a repayment date of more than one year. Here the formula is slightly different: CT / (K + AB) * 100 ≤ 120%. Here, KTs are credit claims with a repayment term of more than 365 or 366 days. K is the capital of the bank, and OB is the financial institution's obligations on loans and deposits that were received by it. The maximum allowable value in this case is set at 120 percent. Standards are good. But something more is needed. For example, specific indicators of bank liquidity. 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 just for this, we need coefficients. But how to get them? It is also necessary to interpret correctly in order to make the necessary, adequate and effective decisions. An analysis of the current situation will help in this matter. What and how to do it?
General Analysis Theory
Most of the techniques that study the factors affecting the liquidity of a bank are built at such stages:
- Assessment of financial condition in terms of solvency. It is checked to what extent the real state of affairs allows timely and fully ensuring the fulfillment of obligations undertaken. It is necessary to prevent and eliminate the occurrence of deficiencies and excess liquidity. In the first case, insolvency of the financial structure may arise, while in the second case, profitability will be under attack. This stage is necessary to determine the initial base - identifies the main problems and determines the general trends and prospects for improvement.
- 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 current policy. And in particular - on its liquidity. When negative trends are studied, it is necessary to identify the main causes that caused their appearance, analyze their impact and develop recommendations for the prevention of negative consequences. First of all, we are talking about macroeconomic factors. This is the effectiveness of state regulation, control, economic and political situation in the country and / or region, and the like. At the micro level, the following matters: quality of management, size (especially sufficiency) of equity, stability and quality of the resource base, degree of dependence on external sources, riskiness of assets, structure, profitability and diversification. In addition, off-balance sheet operations have a certain effect.
- Structural analysis, as well as assessment of the effectiveness of the management of liabilities and assets.
- Study of liquidity ratios.
The last two points deserve separate consideration.
About structural analysis of bank liquidity and assessment
In general, the solvency of any financial institution is based on supporting a certain ratio between the individual components: equity, borrowed funds and allocated money. 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, you need to make sure that there is such a balance structure when the assets do not lose their price and change on demand on time.
It is also necessary to pay attention to the dynamics of the volume of operations and reflect them in the form of transformation of assets / liabilities. In this case, the specific gravity of specific groups and species is determined. Before you start working with them, you need to clear the data from re-counting. That is, subtract articles that only nominally increase assets, as well as liabilities (for example, losses, depreciation, use of profit). This is the structural analysis.
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 operations performed is investigated and the following main groups are formed: own obligations, demand deposits, urgent and other liabilities. Their analysis will allow you to get a general idea of the resource base with which you have to work. At the same time, quantitative and qualitative characteristics are reflected. But nevertheless, the greatest interest is provided by assets. They should be sufficient, and their structure - to meet the requirements of liquidity. Therefore, all assets are divided into groups, after which their share is estimated. Allocate: highly liquid assets, available funds, long-term, not sold. Their structure may vary depending on what obligations are necessary to ensure.
The study of liquidity ratios
And we come to the final moments. The data that is obtained at this stage is taken into account in short-term recommendations for maintaining the liquidity of the bank's balance sheet. Although they can be used in developing a global strategy for a financial institution. So, the liquidity ratios that are obtained by processing the data are divided into two main groups:
- Regulations. We have already considered them. It should only be noted that they are established by the Central Bank and are binding on all commercial entities working in their area of supervision.
- Estimated odds. They can be developed by specialized companies or the analytical service of the bank. Their values do not have to be respected. 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 manipulation of information, data manipulation, the use of various tools to present the situation in a more favorable light. What is better to use to evaluate the liquidity of a commercial bank?
Using additional tools
This turns into a problem for the analytic service. Are used:
- Settlement documents that were not paid on time due to a lack of funds in correspondent accounts. This suggests that there are problems. As reference points, off-balance accounts 90903 and 90904 are used. If the balances on them have a tendency to grow for a long time, then the bank is recognized.
- Level of business activity. It is the ratio of cash register and correspondent accounts to net balance sheet assets. It is used to assess the overall level of business activity and the impact of 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 norm is a value greater than one.
- The ratio of liquid and net position. It allows you to evaluate how actively borrowing to cover the deficit. If it is less than one, then this indicates problems.
- Ratio of the current balance of liabilities and assets. Used to assess the likelihood of problems. If it is more than unity, then this option is practically excluded. If it is below 0.6 and decreases, a liquidity shortage is expected.
- Medium-term balance ratio. Similar to the previous one. But the term for him is 180 days. Used to manage both the future and a specific date.
Conclusion
How vast is the topic. When considering something, the volume of a book is almost always necessary. The bank’s assets are no exception to this. A lot of information was reviewed. But not all. So, in addition to the coefficient method, the current liquidity of a bank can also be served by a cash flow management mechanism, which reflects not only liabilities and assets, but also off-balance sheet transactions conducted by a credit institution. But in order to learn all the nuances and aspects, it takes a lifetime. New information appears, some data become outdated, lose their uniqueness. Take, for example, the standards established 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 difficult crisis situation, which will literally bring down the economy. It is impossible to foresee and predict everything and everything precisely. The affordable maximum is simply to increase the likelihood that everything will go well.