Academic journal article E+M Ekonomie a Management

Liquid Assets in Banking: What Matters in the Visegrad countries?/Likvidni Aktiva V Bankovnictvi: Na Cem Zalezi Ve Visegradskych Zemich?

Academic journal article E+M Ekonomie a Management

Liquid Assets in Banking: What Matters in the Visegrad countries?/Likvidni Aktiva V Bankovnictvi: Na Cem Zalezi Ve Visegradskych Zemich?

Article excerpt

Introduction

During the global financial crisis, the financial sector has gone through a dramatic re-appraisal of liquidity risk. As a result of a continued drop in the market value of mortgage-backed securities from the subprime segment of the US market and the announcement of problems of some European banks, the interbank market came under extreme strain. This confidence crisis had the following consequences: (i) Amidst increased market nervousness, interbank interest rates sharply rose. (ii) Many segments of the structured credit and mortgage market ceased to trade at all, making it difficult to price outstanding positions. (iii) Investors sometimes failed to raise enough cash through asset sales. (iv) Interbank lending became scarce in a context of liquidity hoarding [17]. In response to the freezing up of the interbank market, the European Central Bank and U.S. Federal Reserve injected billions in overnight credit into the interbank market. However, some banks needed extra liquidity supports [12], [28]. Even with extensive support, a number of banks failed, were forced into mergers or required resolution [8].

Liquidity problems could be seen also in the Hungarian and Polish banking sector. Three Hungarian banks (OTP Bank, FHB Mortgage Bank and MFB--Magyar Fejlesztesi Bank) were provided with a loan from the government in March 2009. The loans were provided at market interest rates for three and a half years from the credit line that Hungary received from the International Monetary Fund and the European Union. The primary goal was to ensure the liquidity of banks that have no foreign parent bank. The banks made a commitment that they would use the funds for lending to retail and small and medium-sized entrepreneurs in Hungary. Besides, FHB Mortgage Bank was granted a HUF 30 billion equity raise [20]. In the Polish banking sector, the situation was not so dramatic. However, the deterioration in the macroeconomic situation weakened the functioning of the interbank market, increased the cost of money on the market and deepened the gap between deposits and loans [30].

It is evident that bank liquidity and liquidity risk is a very up-to-date and an important topic which should be of crucial importance for academics and policymakers. The aim of this paper is therefore to describe the development of liquid assets ratios and to find out determinants which affect their values in the Visegrad countries.

The financial system in the Visegrad countries is traditionally based on banks and credit markets. The Czech Republic, Hungary, Poland and Slovak Republic are a part of an economically integrated area. Although all Visegrad countries are characterized by a universal banking model, activities of banks in the financial markets significantly differ. Various studies investigated various aspects of the functioning of stock markets [36], exchange rates [35], bank concentration, competition and efficiency [34] and financial integration in the Visegrad countries [23], [40]. However, the empirical evidence of determinants of bank liquidity in these countries is still missing (the only complex study of determinants of bank liquidity in these countries uses data only for the period 1994-2004 [16]). The contribution of this paper is therefore obvious.

The paper is structured as follows. The next section defines bank liquidity and characterizes methods of its measuring. Section 2 describes trends in liquid assets in the Visegrad countries. Following sections focus on the model and show results of a regression analysis. The last section captures concluding remarks.

1. Bank Liquidity and its Measuring

Bank for International Settlements [7] defines liquidity as the ability of bank to fund increases in assets and meet obligations as they come due, without incurring unacceptable losses. Liquidity risk, e.g. the risk that a bank would not have enough liquidity, arises from the fundamental role of banks in the maturity transformation of short-term deposits into long-term loans. …

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