Liquidity risk management UK and US banking industry

There are figure of grounds for accepting to concentrate on this peculiar sector. Banks play an of import function in the economic system. With the alteration of fiscal environment over the last few decennaries it can be seen that it has led to a critical exposure towards liquidness hazards. Followed by the worst fiscal convulsion of all time, there are many inquiries to be asked. However it has simply been determined as a “ liquidness crisis ” one of the chief drivers of the current fiscal crisis. Collapses of major Banks in UK and USA have given a important force per unit area on fiscal markets every bit good as planetary economic systems.

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Since 1988 regulators have paid a plentifulness of attending and have defined international criterions for Bankss in the countries of market operational and recognition hazards. But they have ignored liquidness hazard. Although some Bankss who failed to pull off their liquidness places during the fiscal crisis have passed the guidelines for pull offing liquidness hazards by both Bank of International Settlements and the Institute of International Finance ( Cuthber B.and Vander D. 2008 ) .

After confronting the worst crisis of all time, most of the fiscal establishments, Cardinal Banks and regulative organic structures declared to do liquidness every bit of import as capital and to pull off liquidness hazards exactly ( Blair-Ford S. 2009 ) .


The country to be researched, scrutiny of literature, the focal point of single bank ‘s schemes and the demands of regulative organic structures, it was a important issue that the subject of most of theoretical and practical disbursal to be examined the importance of liquidness hazard direction. Besides this subject has been discussed in bing surveies and the formation of the aim is to analyze the Bankss schemes who performed good and who failed to execute during critical economic conditions. Collapse of Northern Rock, Lehman Brothers and Bear Sterns can be identified as hapless direction of liquidness in the banking industry ( Heaney V. 2009 ) . Collapses of these Banks have made a immense impact in developed states fiscal markets and economic systems. Then it spreads to emerging markets and the planetary economic system consequently.

However, at the same clip some other Bankss survived and performed good during the critical economic and fiscal conditions.

This research is being analysed the liquidness hazard direction schemes of performed Bankss and placing Bankss with weak liquidness and eventuality planning within the context of the bank ‘s function within the fiscal system. Factors influenced on liquidness hazards have besides been considered.

At the same clip this research is being discussed the duties of Cardinal Banks, ( Federal Reserve, Bank Of England, and European Central Bank ) and the other regulative organic structures such as Basel Committee and Financial Services Authority ( FSA ) in UK.

The aims of the research are

The impact of bank stableness, exposure to liquidness hazard in critical economic conditions and schemes to be implemented in such conditions

The impact of economic systems, fiscal markets and the bank itself towards hapless liquidness direction

Disclosure demand for Bankss towards liquidness hazard schemes

The importance of a regulative frame work within the banking industry towards pull offing liquidness hazards.

The research worker is taking to accomplish by making this research is to find the importance of pull offing liquidness hazards in the banking industry and the importance of the frame work in the position of regulative organic structures to understate liquidness hazard direction.


3.1 What is liquidity direction?

Harmonizing to theory when liabilities exceed assets, there is an surplus of financess which generates involvement rates risk, while shortage leads the bank to long tally committednesss which bing resources do non wholly fund. Therefore there is a liquidness hazard has generated by raising financess in the hereafter to fit the assets ( Bessis J. p-139 ) . Liquidity hazard demands to be managed and harmonizing to Bessis J. ( p-144 ) liquidness direction is the uninterrupted procedure of raising new financess. Although the theory suggests involvement rates risks which is generated from the mismatch can be set off with forward hedges.

3.2 Importance of liquidness direction in banking industry

Banks play an of import function in the economic system. Historically in 1930 and once more 1970 multiple banking failures have been caused as a consequence of weak liquidness direction ( ) . The Bankss attack and direction of liquidness hazard is one of cardinal constituent in the “ CAMELS ” ( Capital, Asset quality, Management, Earnings, Liquidity and Sensitivity ) which is used to measure Bankss fiscal and direction evaluation by US regulators ( Beaumier C.M. 2009 ) . Besides harmonizing to banking books Bankss borrow short term and impart long term and it increases three obvious hazards, recognition hazard on the loaning, long term involvement rate hazard and liquidness hazard from the mismatch between the construction of assets and liabilities ( )

Harmonizing to Jenkinson N. Executive manager for fiscal stableness, highlighted that the direction of liquidness hazard is a cardinal opposite number to Bankss in their adulthood transmutation function. He identified that to keep a buffer of extremely liquid assets as a defense mechanism.

3.3 What are the factors act uponing liquidness hazards?

In theory to find liquidness hazard it ‘s indispensable to place the associate other hazards as market hazards recognition hazards every bit good as off equilibrating hazards such as contingent hazards ( Bessis Joel ) .

3.4 Disclosure demand

Liquidity hazard is the most cause of bank failure. If the liquidness hazard is the ground for most Bankss failure so it ‘s logically to presume that it attracts a high degree of revelation. Most of the past bank one-year studies found the greatest attending has paid recognition, market and operational hazard. However the last hazard that Basel ‘s attending was liquidity hazards ( Blair-Ford S. 2009 ) .

3.5 What is the most appropriate manner to find liquidness hazards?

In literature, some of the authors argue it ‘s worth the quantitative attack ( ie: capital based attack, liquidness at hazard LaR, Non-maturing assets and liabilities NomAL ) instead than the qualitative attack to carry liquidness. However the unequal regulative attending that liquidness has attracted has been qualitative. But there are some jobs in handiness of informations and but Bankss should take reasonable stairss such as mensurating its ability to bear a figure of different liquidness scenarios ( Cuthber B.and Vander D. 2008 ) .

In pattern about for the first clip, standardization is a good intelligence in mensurating liquidness hazard which is most of the regulators, practicians are working within a common model, on the other manus the bad intelligence is there is a confusion, as an illustration most of the US bankers still use the technique of retrospective ratios to supervise liquidness hazards ( Matz L. 2010 ) . Matz besides explains the methods of Counterbalancing Capacity ( CBC ) , “ Buffer ” , “ Forward liquidness exposure ” ( FCE ) and “ Survival Horizon ” such as “ Liquidity modesty ” within the model of liquidness hazard. Stress proving processs on liquid assets, Contingency Funding Plan ( CFP ) , Key Risk Indicators ( KRI ) and Scenario Based Testing have besides been identified as measuring the liquidness measuring.

3.6 Schemes to be implemented in liquidness hazard direction

Harmonizing to Cuthber B. and Vander D. ( 2008 ) many liquidness hazard directors have standard scenarios harmonizing to the bank ‘s specific liquidness resources. Alternatively they look at the yesteryear ( Internet Explorer: Asiatic crisis ) and Cuthber and Vander argue that it ‘s non sufficient in analyzing liquidness hazard scenarios. Alternatively Bankss need to analyze their balance sheet construction to place the more hazardous scenarios.

Waugh R. ( the president of IIF Committee and President of Scotia Bank Canada ) on market best patterns contributes his belief, that hazard direction patterns need to be tailored to each house ‘s concern theoretical account and market engagement. Each house should find its sensitiveness to hazard, and the best manner to unite prudent hazard direction patterns within its concern scheme. At the same clip he argues that even the house ‘s most prudent ordinances can non and will non vouch turning away of hazard and hence the ordinances and supervising is needed implementing the best schemes. At the same clip it is of import that the house needs to develop a strong hazard civilization, good understood and resilient liquid civilization, and liquidness issues and costs should take into history in planning, merchandise development and determination devising in multiple degrees.

“ Consequently more establishments are gaining that liquidness hazard measurings in the direction position lends itself to utilize the scenario instead than stochastic ” Additionally direction should understand that the houses liquidness demands harmonizing to market conditions every bit good as the nature of balance sheet itself. ( Vander D. , liquidness specializer and the Co-founder of Liquidatum ) .


What will be the impact on economic system and fiscal markets if Bankss fail to pull off liquidness hazards?

Have the revelation demand been met by Bankss towards liquidness hazards?

The Bankss that met revelation demands and followed the regulative model did execute over the weak economic conditions?

Have the Central Banks and regulative organic structures paid adequate attending on liquidness hazard direction?


Research design

This research can be identified as an explanatory research which is an issue that already known and have a description. To explicate is the intent of this research and it tries to find the importance of liquidness hazard direction in banking industry.

Data aggregation

In this research, in order to run into its cardinal aims, secondary informations have been identified as the most appropriate aggregation method. Documentary secondary informations are frequently used in research undertakings and it includes Archival research, written paperss ( I: vitamin E, books, diaries, magazine articles, newspapers, notices, correspondence, studies to stockholders transcript of addresss and administrative and public records ) , non-written paperss and so on. Harmonizing to Bryman ( 1989 ) although the archival research has historical kernel, it can mention to recent every bit good as historical paperss ( Lewis P. Saunders M. & A ; Thornhill A. 2003 ) . At the same clip written paperss are used to get qualitative informations.

Analysis of informations

Conduct a reappraisal of literature ( utilizing secondary as mentioned ) of the following

liquidness direction of fiscal establishments

duties of Cardinal Bankss

regulative organic structures

other economic and fiscal factors towards liquidness hazard

Review hazard profiles utilizing one-year studies of Bankss who manage their hazards during critical conditions, comparing them with Bankss who failed.

Identify hazard direction schemes

Decision and recommendations


Abstract and Introduction – 1 hebdomad

Literature Review – 2 hebdomads

Research Methodology and Methods – 1 hebdomad

Analysis and reading – 2 hebdomads

Decision, recommendations and mention – 1 hebdomad


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