Thuyết trình assignment LIQUIDITY AND RESERVE MANAGEMENT STRATEGIES AND POLICIES

1 LIQUIDITY & RESERVE MANAGEMENT STRATEGIES & POLICIES Phạm Tâm Long Nguyễn Hữu Bảo Bùi Việt Anh Hoàng Phương Quỳnh Đỗ Khánh Huyền CONTENTS LIQUIDITY RISK MANAGEMENT OF LIQUIDITY RISK OF BANK LIQUIDITY RISK Definition of liquidity of bank Definition of liquidity risk The relationship between liquidity and bank reserves Reason to happen liquidity risk 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 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 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 4.1 MODEL OF SUPPLY OF AND DEMAND FOR LIQUIDITY SUPPLY OF LIQUIDITY 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 4.1 MODEL OF SUPPLY OF AND DEMAND FOR LIQUIDITY DEMAND FOR LIQUIDITY 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 4.2 THE REASON OF HAPPEN LIQUIDITY RISK SUBJECTIVE REASON REASON TO HAPPEN LIQUIDITY RISK Due to the maturity of asset and liability are disproportionate Risk of imbalance in asset structure Customer structure is not reasonable Because banks are pursuing profit targets in short term Because banks not estimate the need of withdrawals or obligations to pay As the financial capacity of banks is limited Due to the multiple currency trading, it is created the liquidity risk and financing requests each currency Due to the reduced of bank’s prestige, the depositors quickly withdraw the deposit causing the liquidity risk 10 4.2 THE REASON OF HAPPEN LIQUIDITY RISK OBJECTIVE REASON REASON TO HAPPEN LIQUIDITY RISK Financial assets are susceptible to fluctuations of interest rates Monetary policy of the central bank Legal framework of operational safety in credit institutions system Due to the customer's business cycle Due to the special characteristics of the cycle business Due to economic crisis or financial crisis Due to rumors 16 AT THE SECOND STEP 17 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 Loans and deposits must be forecast for a given liquidity planning period Step The estimated change in loans and deposits must be calculated for the same period Step 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 18 AT THE THIRD STEP 2.1 Estimating liquidity needs METHOD 2: The structure of funds approach Step Divide fund into group depend on the ability of withdrawal HOW TO PREVENT LIQUIDITY RISK Step Determine reserve for liquidity of each group Step Estimated liability liquidity reserve Step Estimate liquidity for increase the maximum of credit operation Step Estimate total liquidity requirement Step Bank use stress testing to make many scripts with many ability happen so as to estimate demand for liquidity of each script 19 2.1 Estimating liquidity needs 20 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 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 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 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 21 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 22 2.3 Prevent liquidity risk Liquidity risk management model HOW TO PREVENT LIQUIDITY RISK About the risk management structure -There are main elements -The frame -The infrastructure -The risk management steps 23  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 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 24 3.Control the status of liquidity of banks Từ 3060 Từ 6190 Từ 90180 Từ >181 Các luồng 1.50 1.400 tiền cộng 1.250 dồn -1.600 -1.500 1.000 2.000 Dự trữ 3.03 4.030 3.830 vốn khả dụng cộng dồn (+) 3.830 3.530 3.500 3.500 Hạn mức 1.50 1500 2.000 500 300 1.200 Gap cộng dồn 4.53 2.780 5.230 2.230 2.030 4.500 5.500 “Lớp đệm" cộng dồn 3.03 1.280 3.230 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 25 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 26 4.1.Fist strategy Asset liquidity management strategies: - Bank should to hold the liquid assets and be profitable When bank needs liquid, can buy and discount them to receive money Example: Discount Treasury bills to Central Bank: Assets that bank should hold: - Treasury Bills Treasury Bills were used widely in banking system because: - Purchase of liquidity securities under a repurchase agreement -the liquidity is very high - Placing correspondent deposits with various depository institutions -central bank usually helps bank to - Municipal bonds and notes - Fed agency securities supply funds for liquidity by buy - Negotiable certificates of deposit T.Bills with role of last borrower - Eurocurrency loans for commercial banks - Fed funds loan to other institutions 27 4.2.Second strategy: Borrowed liquidity management strategies When bank needs liquidity, bank can borrow from central bank and other commercial bank through discount window or interbank market This solution was used widely because time for transfer money in interbank market is fast and the loans from borrow in interbank market mainly short-term loans, so banks with idle funds also want to lend for other bank needs liquidity so as to receive high overnight rate and the relationship among banking system 28 4.2.Second strategy: Borrowed liquidity management strategies Fed fund borrowings Selling liquid, low risk securities under a repurchase aggrement A   C B Bank can borrow from sources  D  Securiting advances from the Federal Home loan bank  Borrowing reserves from discount window of central bank Issuing negotiable CDs  E F Issuing Eurrocurrency deposits 29 4.3.Third strategy: Balanced liquidity management strategies 30 THANK FOR YOUR LISTENING ... CONTENTS LIQUIDITY RISK MANAGEMENT OF LIQUIDITY RISK OF BANK LIQUIDITY RISK Definition of liquidity of bank Definition of liquidity risk The relationship between liquidity and bank reserves Reason... SUPPLY OF AND DEMAND FOR LIQUIDITY DEMAND FOR LIQUIDITY 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... 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