отчет по практике Мантатова

Министерство образования и науки Российской Федерации

ФГБОУ ВО «Байкальский государственный университет»

Кафедра финансов

ОТЧЕТ ПО ПРОВЕДЕННОЙ

НАУЧНО-ИССЛЕДОВАТЕЛЬСКОЙ РАБОТЕ

Студент(ка):					МБФ-15, Мантатова А. В.
	дата		подпись		группа, Ф.И.О.

Руководитель					к.э.н, доцент, Оношко О.Ю.
	дата		подпись		должность, Ф.И.О.

Иркутск, 2016

TABLE OF CONTENTS

INTRODUCTION 2

1. THEORETICAL BASIS OF LIQUIDITY MANAGEMENT 3

2. LIST OF LITERATURE 12

CONCLUSION 14

INTRODUCTION

In today’s banking business, liquidity risk and its management are some of the most critical elements that underlie the stability and security of the bank’s operations, profit-making and clients confidence as well as many of the decisions that the bank makes. The stability of commercial bank system depends on how successfully commercial bank managed profitability and liquidity parameters as well as implemented asset management strategy. On the one hand lack of liquid assets can lead to inability of the bank do its payments, on the other hand, excess of liquid assets shows that lose its profitability. That’s why it’s crucial to find out ways to increase an efficiency of liquidity management in banks.

The purpose of this work is to describe theoretical basis of liquidity management in banks and find out mathematical background such as financial ratios and mathematical model for the future research.

1. THEORETICAL BASIS OF LIQUIDITY MANAGEMENT

Banks have to deal with different risks during their activity in order to performance as a profitable and sustain organization. The fundamental role of banks is being financial intermediaries transform short-term deposits (liabilities) into long-term loans (assets) and this makes banks vulnerable to liquidity risk.  The transformation process creates asset and liability maturity mismatches on banks’ balance sheet that must be actively managed with available liquidity. Liquidity risk management is a key banking function and an integral part of the asset and liability management process. It’s important for banks analyze whether their liquidity risk management is effective or not in order not to lose their license and to get profit.

The work investigates the relationship between banks’ liquidity level and its profitability in Russia. Banks’ liquidity level is determined by liquidity ratios: quick liquidity ratio, current liquidity ratio and long-term liquidity ratio. Profitability of Russian banks is represented by rate of return on assets. The relationship between banks’ liquidity level and its profitability in Russia is defined in period of liquidity crisis and in period of stable economic situation in a country. The relationship between bank liquidity level and its profitability is supposed to be defined with help of regression analysis to test the hypothesis. The results of this study have shown that it’s important for banks to find optimal level of liquid assets that allow to avoid lack of liquidity and it’s excess. In this case the effective liquidity risk management leads to the rising of bank profitability.

Research questions are:

1. What is nature of the relationship between liquidity level and bank profitability?

2. How the relationship between liquidity level and bank profitability in period of stable economic situation in a country differ from that in period of liquidity crisis?

3. How does liquidity management in bank depend on the size of the bank in period of liquidity crisis?

Hypotises are:

1. There is a significant reverse relationship between liquidity level and bank profitability. The excess of liquid assets leads to decrease of bank profitability.

2. Bank’s liquidity ratios are close to the normative coefficients established by Central bank of Russia in periods of stable economic situation in a country. Bank’s liquidity ratios are higher than the normative coefficients during a period of liquidity crisis.

3. Small local banks have higher liquidity ratios than huge federal banks during a period of liquidity crisis.

A sample design – stratified random sampling and simple random sampling. Stratified random sampling - a method of sampling that involves the division of a population into smaller groups known as strata. In stratified random sampling, the strata are formed based on members' shared attributes or characteristics.  It can be used probability stratified random sampling because the population (amount of banks) is defined and divided into three strata: federal, regional and local banks. The strata are formed based on the size of banks. After determination of each strata it would be applied simple random sampling to define 10 banks typical for each strata.

Simple random sampling -­ a subset of a statistical population in which each member of the subset has an equal probability of being chosen. A simple random sample is meant to be an unbiased representation of a group. It can be used because the population is defined. There are 647 banks in Russian Federation on 18.08.2016.

Data collection method: an every bank is required to disclosure annual reports. This study made use documentary secondary data from annual report of commercial banks, bulletin of Central Bank of Russia and information from official website of Central Bank of Russia.

Liquidity for a bank means the ability of a bank to fund increases in assets and meet obligations as they come due, without incurring unacceptable losses. The fundamental role of banks in the maturity transformation of short-term deposits into long-term loans makes banks inherently vulnerable to liquidity risk,2 both of an institution-specific nature and that which affects markets as a whole. Virtually every financial transaction or commitment has implications for a bank’s liquidity. Effective liquidity risk management helps ensure a bank's ability to meet cash flow obligations, which are uncertain as they are affected by external events and other agents' behaviour. Liquidity risk management is important because a liquidity shortfall at a single institution can have system-wide repercussions.

In other words, maintenance of liquidity at all times is the paramount order of the day in banking. The business of banking itself creates maturity mismatches between assets and liabilities, and hence liquidity risk. In fact, to undertake banking is to assume a continuous ability to roll over funding, otherwise banks would never originate long-dated illiquid assets such as residential mortgages or project finance loans. As it is never safe to assume anything, banks need to set in place an infrastructure and management capability to ensure that liquidity is always available, to cover for all times when market conditions deteriorate. Because banks are so important to the economy's health, central banks operate as "lenders of last resort" to come to the aid of a bank that finds itself in liquidity difficulties. However, a bank that has to resort to the central bank for funding has failed, and this is a failure of its management [10, p.722].

The importance of liquidity risk management is such that it must be addressed at the highest level of a bank's management, which is the Board of Directors. The Board will delegate this responsibility to a management operating committee, usually the Asset Liability Committee, but it is the Board that owns liquidity policy [1, p. 594]. If it does not own it, then it is not following business best-practice. Given this, it is important that the Board understands every aspect of liquidity risk management such as:

• definition of liquidity risk;

• the role of liquidity risk management;

• board responsibilities;

• liquidity strategy, policy and processes;

• regulatory requirements and reporting obligations;

• funding strategy and policy;

• liquidity risk tolerance;

• institution-specific and market-wide stress scenarios, and stress testing;

• forecasting funding cash flows over different time horizons;

• the liquidity buffer;

• intra-group and cross-border group lending;

• liquidity contingency funding plan and stress testing;

• the link between liquidity and capital adequacy;

• the benefits of strong business intelligence.

In other words, liquidity management is devised and dictated from the highest level, and influences every aspect of the bank's business strategy and operating model.

Liquidity risk is the current and potential risk to earnings and the market value of stockholder’s equity that results from bank’s inability to meet payment or clearing obligations in a timely and cost-effective manner. The literature on the determinants of liquidity risk is relatively scarce, in general, the empirical researches being focused mostly on the case of the advanced economies. For example, the research of Bonfim and Kim “Liquidity risk in banking” written in 2012 highlights how a sample of European and North American banks manage liquidity risk, over the period 2002-2009 [5, p.79]. In particular, using regression analysis based on panel data, the authors con­sider three different measures of liquidity risk and attempt to understand whether banks tend to take more risks in a crisis period and if they follow similar strategies in these periods. The authors also identify the determinants of liquidity risk. The results highlight that the type of relationship between liquidity risk and size, performance and the ratio between loans and deposits depends on the type of liquidity risk measure used. Bank size generally has a positive impact on bank liquidity, while the performance measure has an ambiguous relationship with li­quidity risk. The results provide important insights for regulators, suggesting that banks have a collective behavior in the pre-crisis period, reflected in a global deterioration of liquidity indicators and that collective risk taking incentives are focused mainly among the largest banks worldwide.

One of the most important parts of commercial bank management system is correctly chosen strategy in the circumstances of a changing environment. Strategy gives a possibility to look into the future of the commercial bank, forecast its goals, areas, scale and potential operational results in relation to resource sources and expenses. In the article “Some Quantitative Aspects of Stability Management Strategy in a Bank” written by Sksonova and Solojova in Procedia - Social and Behavioral Sciences journal in 2012, the authors analyze the parameters of Latvia's commercial bank operations with a goal to prove that the stability of commercial bank system depends on how successfully commercial bank managed profitability and liquidity parameters as well as implemented asset management strategy. This article characterizes the contours of the optimal stability strategy for banks with an emphasis on banks operating in the transition economies. This paper proposed a management strategy of separating asset portfolios into distinct groups and ensuring that each type of asset portfolio is backed by a liability with a corresponding time profile. In addition, the role of the overall bank's strategy on the market was analyzed and it was shown how it relates to the decisions on asset allocation. The author distinguishes three types of asset transformation, which banks use in the process of their operation: quantitative, qualitative and time. Quantitative transformation is transforming comparatively small deposits into significant amounts of money (assets), which is necessary to finance large enterprises. Qualitative transformation is used to decrease asset risks. Resources attracted by the bank (liabilities) are placed using diversified asset portfolios, which means increased safety both for the assets and the liabilities. Apart from that banks perform constant monitoring of the borrowers, which also decreases risks of losing the assets. In context of creating optimum asset portfolio, the time asset transformation has a special meaning. Generally asset time transformation is transforming short-term deposits into medium and long-term loans, which can destroy bank's current liquidity. This risk can be partially decreased, using short-term interbank loans and derived instruments of financial markets (swap, futures etc.). Banks have to follow changes in real liabilities with different time stability closely (ideally - every day), in order to implement timely measures of their asset portfolio transformation to maintain current liquidity. The results of the research underline that that banks should maintain their liquidity by optimizing cash flow and the structure of assets and liabilities. In this case the tasks of bank management are managing the cash flow, improving the structure and quality of assets and liabilities, controlling liquid assets and forecasting the liquidity position of a bank.

In the article “Bank Liquidity Risks: Analysis and Estimates” written by Meilė Jasienė, Jonas Martinavičius, Filomena Jasevičienė, Gražina Krivkienė in Buisness, Management and Education journal in 2012 it is analyzed the importance and management of liquidity risk that commercial banks incur, developed a commercial bank liquidity management model, and analyzed how this model can be applied in practice by drawing on the case of one commercial bank controlled by a foreign bank [7, p.192]. After analyzing the notions of risk that different scientists present, authors sum up that the liquidity risk of a bank is risk that the bank will be unable to meet its obligations when due as a result of shortage of liquid funds and will therefore suffer losses after a sharp decline in the amount of financial resources and an increase in the price of new funding to cover up previous debts. The main goal of managing liquidity risk is to ensure as profitable operation of the bank as possible, by maintaining a sufficient level of liquidity buffer to safeguard stable business of the bank. Effective management of liquidity provides a backbone for earning maxi­mum profit at a certain liquidity risk level. The underlying liquidity management methods are based on managing the bank's assets and liabilities at a certain moment in time. Liquidity demands can be identified using methods of deposit structure and cash flow reporting. The first method embraces a thorough analysis of the structure of deposits accepted by the bank. The second meth­od supplements the first one and covers the possibilities to withdraw deposits as well as the demand for credit. Assessment of liquidity risks in the bank is based on managing short-term (up to one month) and long-term (one-year) liquidity. As a result of study the author offer a model of managing both short- and long-term liquidity. Short-term liquidity of the bank is managed in line with the liquidity ratio requirement prescribed by the Central bank by securing a required amount of obligatory reserves and complying with short-term liquidity ratios as well as the limits that apply to them. Long-term liquidity management relies on forecasting the need for liquidity, deposit and loan flows, meet­ing the need for liquidity, liquidity gap analysis and assessment of long-term liquidity indicators

Liquidity risk may arise from the inability of a bank to provide liquidity as stipulated in the contracts, either to investors or depositors, this being extremely well underlined in the context of the recent global financial crisis. In the article “Banks liquidity risk analysis in the new European Union member countries: evidence from Bulgaria and Romania” written by Roman and Sargu in Procedia - Social and Behavioral Sciences journal in 2014, the aim of the research is to evaluate the liquidity risk of the banks operating in Bulgaria (11 banks) and Romania (15) in the context of the EU ascension process [8, p.574]. In order to achieve this authors have investigated the role and impact that a series of financial indicators for the capital adequacy, assets quality, management quality and profitability have on the liquidity risk of the banking institutions, the analyzed period is 2003-2011. The ascension to full time members of the European Union of Bulgaria and Romania has had a tremendous effect on these countries banking systems, determining a series of changes both in the operating strategies and also in the market dynamics. The research shows that the joining in the European Union by Bulgaria and Romania has lead to an increase of the number of foreign owned bank in the two countries. It also leads to an increase of the capital adequacy ratio. These two evolutions have lead to additional demands from the shareholders for the banks to increase their returns either through more profitable investments or by increasing the volume of revenue generating assets and implicitly decreasing the volume of liquid assets. On the other hand the ratio of impaired loans plays also a decisive role in the way in which the banking institutions operating in Bulgaria and Romania are managing their liquidity. This is directly influenced by the policies adopted by the Central Banks of the two countries; hence the different connection that exists between the liquidity indicators and the ratio of impaired loans to gross loans in the case of the Bulgarian and Romanian banks respectively. The obtained results underline that the capital adequacy ratio and the ratio of impaired loans to gross loans have a statistically significant impact on the liquidity risk of the banks operating in Bulgaria and Romania.

The work “The Impact of Liquidity Management on the Profitability of Banks in Nigeria” written by Sunny Obilor Ibe in Journal of Finance and bank Management in 2013 investigated the impact of liquidity management on the profitability of banks in Nigeria [10, p.39]. The work is necessitated by the need to find solution to liquidity- management problem in Nigerian banking industry. Three banks were randomly selected to represent the entire banking industry in Nigeria. The proxies for liquidity management include cash and short term fund, bank balances and treasury bills and certificates, while profit after tax was the proxy for profitability. Elliot Rothenberg Stock (ERS) stationary test model was used to test the run association of the variables under study while regression analysis was used to test the hypothesis. The author concludes that that there is a significant relationship between liquidity and bank profitability. Treasury bills and certificates have a significant impact on bank profitability and bank balance has also an influence on bank profitability. The research shows that there is a significance positive relationship between cash (and short term fund) and profit after tax. The result of this study has shown that liquidity management is indeed a crucial problem in the Nigerian banking industry. The study therefore recommends that banks should engage competent and qualified personnel in order to ensure that right decisions are adopted especially with the optimal level of liquidity and still maximize profit.

2. LIST OF LITERATURE

For the research following sources will be used:

1. Choudhry M. The Principles of Banking. – John Wiley & Sons, 2012. – p.912

2. Draper N. R., Smith H. Applied regression analysis. – John Wiley & Sons, 2014. – p.618

3. Apatachioae (2013) The performance, banking risks and their regulation, Procedia Economics and Finance 20, p.35-43

4. Bank for International Settlements, 2010. Basel III: International framework for liquidity risk measurement, standards and monitoring, Basel Committee on Banking Supervision, Basel.

5. Bonfim, D. and Kim, M., 2012. Liquidity risk in banking: is there herding, European Banking Center Discussion Paper No. 2012-024, p. 78-81

6. Drehmann, M. and Nikolaou, K., 2009. Funding liquidity risk definition and measurement. ECB Working Paper 1024, p. 46-49

7. Jonas Martinavičius, Filomena Jasevičienė, Gražina Krivkienė, 2012. Bank Liquidity Risks: Analysis and Estimates, Buisness, Management and Education 10, p. 186-204

8. Roman and Sargu, 2014. Banks liquidity risk analysis in the new European Union member countries: evidence from Bulgaria and Romania, Procedia - Social and Behavioral Sciences 15, p. 569-576

9. Sksonova and Solojova, 2012. Some quantitative aspects of stability management strategy in a bank, Procedia - Social and Behavioral Sciences 58, p. 569-577

10. Sunny Obilor Ibe, 2013. The Impact of Liquidity Management on the Profitability of Banks in Nigeria, Journal of Finance and Bank Management 1, p. 37-49

11. Valverde S. C., Solas P. J. C., Fernández F. R. (ed.). Liquidity Risk, Efficiency and New Bank Business Models. – Springer, 2016.

12. Bernus P., Schmidt G., Shaw M. (ed.). International handbooks on information systems. – Springer, 1998.

13. Ruozi R., Ferrari P. Liquidity risk management in banks: economic and regulatory issues. – Springer Berlin Heidelberg, 2013. – С. 1-54.

14. Höbarth L. L. Modeling the relationship between financial indicators and company performance. An empirical study for US-listed companies : дис. – WU Vienna University of Economics and Business, 2006.

15. Eichberger J., Summer M. Bank capital, liquidity, and systemic risk //Journal of the European Economic Association. – 2005. – Т. 3. – №. 2‐3. – С. 547-555.

16. Ratnovski L. Liquidity and transparency in bank risk management //Journal of Financial Intermediation. – 2013. – Т. 22. – №. 3. – С. 422-439.

17. Almarzoqi R., Naceur S. B., Scopelliti A. D. How Does Bank Competition Affect Solvency, Liquidity and Credit Risk?. – 2015.

18. Castagna A., Fede F. Measuring and Managing Liquidity Risk. – John Wiley & Sons, 2013.

19. Hoose D. The Industrial Organization of Banking. Springer Berlin Heidelberg, 2013.

20. Elbers C., Lanjouw J. O., Lanjouw P. Imputed welfare estimates in regression analysis //Journal of Economic Geography. – 2005. – Т. 5. – №. 1. – С. 101-118.

21. Gatev E., Schuermann T., Strahan P. E. Managing bank liquidity risk: How deposit-loan synergies vary with market conditions //Review of Financial studies. – 2009. – Т. 22. – №. 3. – С. 995-1020.

CONCLUSION

The stability of commercial bank system depends on how successfully commercial bank managed profitability and liquidity parameters as well as implemented asset management strategy. The liquidity management methods are based on managing the bank's assets and liabilities at a certain moment in time. On the one hand lack of liquid assets can lead to inability of the bank do its payments, on the other hand, excess of liquid assets shows that lose its profitability. The research is going to find out if there is a significant reverse relationship between liquidity level and bank profitability. The excess of liquid assets leads to decrease of bank profitability. Besides, results of research would show whether bank’s liquidity ratios are close to the normative coefficients established by Central bank of Russia in periods of stable economic situation in a country, but are higher than the normative coefficients during a period of liquidity crisis. And it would be discovered if small local banks have higher liquidity ratios than huge federal banks during a period of liquidity crisis. Also some peculiarities of liquidity management in Russian banks would be revealed during the research.