Risks Faced by Banks and Regulatory Countermeasures Abstract The essay will analysis and discuss risk and regulation method for banks. There are different types of risks in bank operation; for instance, interest rate risk, credit risk, liquidity risk and operation risk. This essay will focus on the liquidity risk problem in bank and regulation countermeasure of liquidity risk. Regulators improved level of risk management after global financial crisis; therefore, the Basel Banking Supervision Committee put forward new principle to reduce bank risk.
The key finding is new regulation from Basel? to manage liquidity risk in this essay. Introduction In recent years, banks became increasingly complex institutions and exposed to an intertwined set of risks. There are different types of risks in bank; it focuses on the liquidity risk in this essay. Banks faced more serious liquidity risk, in order to increase bank cash flow and liquidity assets. The liquidity risk plays an important role for commercial bank operation.
The liquidity risk indicates that bank lacks of marketability of investment and cannot sale it quickly to prevent loss. Nikolaou, 2009). The liquidity risk has two types, one is funding liquidity risk and another one is market liquidity risk. (Nikolaou, 2009).
The strong of uncertainty and destructiveness are characteristics of liquidity risk; therefore, liquidity risk also called the most deadly risk for commercial banks. In 2008 global financial crisis, the liquidity risk was also one of trigger for Lehman Brother Bank bankruptcy. Liquidity risk problems become more and more important reason of bank failure; therefore, this is reason for author select liquidity risk to analysis.Regulators set up many policies to manage liquidity risk in banks. During the global financial crisis, although many banks had increased the level of capital requirement; however, banks still experienced difficulties because they failed to manage their liquidity assets properly.
After financial crisis, higher cost of liquidity, larger funding spreads and lower market confidence are driving banks to improving their liquidity risk management capabilities. (Swift Website, 2011). The Basel Banking Supervision Committee improved Basel? to Basel? and issued new tandard to regulate liquidity risk. It is an important finding in this essay. The next section will list literature reviews for discuss liquidity risk and regulation method.
The section ? will use model to analysis liquidity risk and new regulation standard from Basel?. The last section will summarize result from analyses part. Literature Review Before the global financial crisis, banks invested many high risk products; however, high profits, high liquidity risk. There are two types of liquidity risk, funding liquidity risk and market liquidity risk.
Nikolaou, 2009). The funding liquidity risk, (Nikolaou, 2009) said, “according to the IMF (2008) funding liquidity risk captures the inability of an Onancial intermediary to service their liabilities as they fall due and market liquidity risk relates to the inability of trading at a fair price with immediacy. ” The liquidity is a high risk for bank operation, especially after the global financial crisis. Regulator issued new standard to manage liquidity risk, the Liquidity Coverage Ratio (LCR) and Net Stable Founding Ration (NSFR) from Basel? Accord.
Eurofi, 2011). In contract, there are also many regulation methods before financial crisis. The regulators prefer transparency of bank system enables a more effective communication of bank asset values to outsiders and reduce liquidity risk. (Ratnovski, 2013).
The LCR and NSFR are more efficient evaluation method than transparency after financial crisis, because this new standard can reduce the liquidity risk and improve ability of prevent assets risk for banks. The hypothesis in essay is LCR and NSFR from Basel? Accord can reduce the liquidity risk for banks.Analysis There are different types of risks in banks; for example, interest rate, liquidity risk, credit risk and default risk. After global financial crisis, the liquidity risk became a serious problem for bank bankruptcy. Liquidity risk is the sensitivity of stock returns to unexpected changes in market liquidity.
(Jeffrey, 2011). The liquidity risk is a key issue for investment portfolios, liquidity securities of investments that have a ready market and relatively stable price over time. (Hudings, 2013) Basel Banking Supervision Committee improved Basel? o Basel? and issued new standard for liquidity risk regulation. The Basel? develops standards to measure and control liquidity risk. There are two ratios of compulsory compliance and tools for monitoring liquidity risk- Liquidity Coverage Ratio (LCR) and Net Stable Founding Ration (NSFR).
(Managementsolutions Website, 2012). The liquidity coverage ratio is one of the Basel Committee's key reforms to strengthen global capital and liquidity regulation; moreover, LCR ratio promotes the short-term resilience of a bank's liquidity risk profile. (Ratnovski, 2013).The LCR ratio= Stock of Counterbalancing Capacity Assets Net Cash Outflow under Stress Scenarios ? 100% The ratio ensuring that the entity has sufficient liquid assets to meet net outflows of liquidity. Banks should increase their capital and liquidity assets to reduce risk when the ratio of bank less 100%. The purpose of net stable founding ratio is stable long-term assets wholesale funding and equity.
The NSFR ratio=Available Stable FundingRequired Stable Funding >100% The NSFR ratio ensuring a balanced balance sheet structure and stable financing needs are funded by stable liabilities. Managementsolutions Website, 2012). The two ratios can calculate an accurate data to evaluate liquidity risk in banks. The two ratios measure the financial stability arising from the improvement in the bank and reduce the risk of financial sector to the real economy. Conclusion The liquidity risk plays an important role in financial crisis, it also a key trigger to make bank failure.
Regulators issued many policies to prevent liquidity risk; for instance, liquidity ratio and liquidity buffer.These policies lack of power of regulation to liquidity risk after financial crisis; therefore, regulator issued new standard to manage liquidity risk- Liquidity Coverage Ratio (LCR) and Net Stable Founding Ration (NSFR) from Basel? Accord. The two ratios will become more important model to evaluate liquidity risk. LCR ratio improves the short-term resilience of a bank's liquidity risk and the NSFR ratio can stable balance sheet.
Besides, the two ratios can calculate from formula; moreover, result of ratios evaluates liquidity risk accurately. Total Words: 1019 Reference
