Measurement of Liquidity Risk of Listed Commercial Banks
Liquidity, profitability and safety are three principles of commercial bank’s operation and management. With the bankruptcy of many financial institutions and the closure of commercial banks during the U.S. subprime mortgage crisis since 2007, liquidity r
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Measurement of Liquidity Risk of Listed Commercial Banks Fang Hu, Wenyi Xia and Zongfa Wu Abstract Liquidity, profitability and safety are three principles of commercial bank’s operation and management. With the bankruptcy of many financial institutions and the closure of commercial banks during the U.S. subprime mortgage crisis since 2007, liquidity risk has become the most fundamental and fatal risk. As Basel Committee issued Basel III in 2010 and China Banking Regulatory Commission issued The Management Measures on Commercial Bank Liquidity Risk in 2011, liquidity risk regulation of banking industry is strengthened. This paper uses 16 China’s listed commercial banks as research objects and employs some indicators to measure the liquidity risk. The paper also studies the relationship between liquidity and profitability of commercial banks, and raises suggestions for strengthening liquidity risk management. Keywords Liquidity risk • Commercial bank • Risk management
46.1 Introduction In 2007, the large-scale subprime mortgage of the U.S. banking industry led to liquidity crisis, which resulted in a number of bank failures and financial crisis extending to the whole world. For a long time, the Chinese public is always having a concept that China’s commercial banks, especially the four state-owned commercial banks, are backed by the national credit [1]. With the changes of economic and financial situations in home and abroad, the Chinese government has introduced a series of policies to deal with the international financial crisis influences and stimulate the economic development [2]. Weak awareness of liquidity risk and lagging management methods of some banks are fully exposed. Therefore,
F. Hu (*) · W. Xia · Z. Wu School of Management and Economics, Tongji University, Shanghai, China e-mail: [email protected] W. Xia e-mail: [email protected] Z. Wu e-mail: [email protected]
W. Du (ed.), Informatics and Management Science I, Lecture Notes in Electrical Engineering 204, DOI: 10.1007/978-1-4471-4802-9_46, © Springer-Verlag London 2013
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strengthening the management of commercial bank’s liquidity risk is significant to the stability of banking system and the safety of financial market [3]. The paper aims to: (1) Establish the comprehensive indicator system to evaluate liquidity risk of China’s listed commercial banks. (2) Study the relationship of bank’s liquidity and profitability. (3) Give suggestions on risk management [4].
46.2 Theoretical Backgrounds Liquidity includes the liquidity of assets and the liquidity of liabilities. The liquidity of assets means the assets can be quickly turned into cash without causing additional losses, while the liquidity of liabilities means the banks timely get the needed funds at the low cost. Mora proposes that banks may not be able to provide liquidity in a bank-centered crisis because a bank-centered crisis may lead investors to question the safety of bank deposits, even with deposit insurance [5]. Liquidity risk can be defined as the po
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