Liquidity Risk on Banking Sector

Liquidity Risk on Banking Sector

Analysis of our results / Research limitations

• Banks should not have gone through the crisis smoothly

• The survival of the banks was made possible by the injection of liquidity from the French State

• These ratios failed at alerting the ability of banks to meet their deadline and need massive state support

• We can doubt the usefulness and performance of these ratios and especially their method of calculation

• It appears empirically that these ratios have not proved their usefulness or predicted the crisis

Literature review

Literature review

Systemic risk

Prudential

ratios

Liquidity

Interbank

market

Liquidity

hoarding

Thanks for your attention

Methodology research

Quantitative methodology

Content

I. Key notions & problematic

II. Methodology

III. Findings

IV. Research limitations

• Quantitative research and numerical data analysis

• Study of indicators and ratios of BNP, CA and SG

• Evolution before liquidity problems arise, implementation of financial instruments and changes of tones and content in the sections dedicated to risks

Findings

Total Regulatory Capital Ratio

Excel figures

• Banks are “Basel II-ready” and deal with this new type of regulation

• The problems faced by banks during the global financial crisis were illiquidity issues

• By increasing its complexity, Pillar I does not make the regulation more accurate

Liquidity Coverage Ratio

Net Stable Funding Ratio

Excel Figures

• Banks are ready to switch to Basel III liquidity ratios

• They have retained a backup of security in the event of a strong liquidity crisis

Excel Figures

• Solidity of the business model

• Banks have maintained constant liquidity reserves and still increase them 10 years after the crisis

Gross amount of HQLA (in Millions of €)

BankScope

NSFR retroactive ratio

• Banks felt that the reserves were sufficient to withstand a liquidity shock

• Did the banks managed to keep the same proportion of cash outflows within 30 days ?

• The LCR, through the period, would at best remain and at worst and deteriorate significantly

Excel figures

• Banks have maintained constant liquidity reserves through the crisis despite the financing problems already raised

• Improved their ratio of stable long-term funds

• Strong sign of resilience and robustness and ability to take measures to ensure liquidity even before the regulator imposes its indicators

A close relationship between financial crisis and liquidity

What is liquidity ?

• Subprime crisis => real estate bubble burst

• Impact on the financial market Banks liquidated assets on financial market but those lost value

=> 2008 banking crisis

Ability of banks to liquidate its positions with no negative impact

on the market to get cash

Three streams of liquidity :

1) clients' savings

2) funds raisings

3) interbank market

Interbank market

BASEL

• High interconnectedness between banks

• Rely on each other

• May lead to SYSTEMIC RISK => contagion and domino effect

Prudential ratios in Basel Committee

Did the prudential standards set up by Basel III

improve the liquidity of French banks?

• Basel I, II, III => cash requirements + liquidity and leverage ratios

• A very powerful approach to defining risk

• Where do they come from, how to calculate them?

Did the prudential standards set up by Basel III improve the liquidity of French banks?