Liquidity and Transparency in Bank Risk Management

Ratnovski, Lev

doi:10.2139/ssrn.2222480

Cited by 4 publications

(5 citation statements)

References 31 publications

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“…erefore, they believed that the commercial bank's own operating system led to the emergence of liquidity risk. Lev [29] analyzed the liquidity risk problem based on the information asymmetry model, confirming that there were the differences of interests and their own conditions that resulted in the problem of information asymmetry between the investors and banks and brought liquidity risks to the banks.…”

Section: Evaluation Of Efficiency Of Fundsmentioning

confidence: 94%

Performance Evaluation Model of Short-Term Mutual Funds Based on Return-Variance-Liquidity

Tian¹,

Wan

Shi

et al. 2022

Security and Communication Networks

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In the past, research on evaluating the portfolio efficiency of mutual funds was mostly based on the mean-variance framework proposed by Markowitz. However, for Chinese short-term mutual funds (CSTMF), short-term mutual funds with different lock-up periods will automatically roll over after the lock up period to restart the funds unless instructed to terminate. By reducing the liquidity of their investments, the lock-up period generates an opportunity cost for investors. The liquidity impacts of different CSTMFs will depend on their lock-up periods. In this paper, we evaluate the portfolio efficiency of the funds by justifying using the lock-up period as a measurement to measure the liquidity risk faced by the investors from the perspective of investors. Therefore, here, we propose to use the return-variance-liquidity framework to evaluate the performance of the funds. Furthermore, we select 28 CSTMF funds to conduct empirical analysis with appropriate DEA models. Firstly, we carry out some comparisons with the traditional mean-variance framework. The results show that the length of the lock-up periods has a significant impact on the fund’s performance, which has important guidance for the investment strategy. Finally, we conduct the benchmarking analysis for the 28 funds and introduce a new DEA model, present how to reduce liquidity risk under the premise of given return and variance, and provide valuable investment advices by combining these with sensitivity analysis. Overall, there are three conclusions: (1) most inefficient funds can be improved using portfolios consisting of funds with shorter lock-up period. (2) For some inefficient funds with shorter lock-up period, the current return and variance levels can be achieved by a portfolio. (3) Among the funds with higher efficiency scores, funds with shorter lock-up period have higher stability.

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Section: Evaluation Of Efficiency Of Fundsmentioning

confidence: 94%

Performance Evaluation Model of Short-Term Mutual Funds Based on Return-Variance-Liquidity

Tian¹,

Wan

Shi

et al. 2022

Security and Communication Networks

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“…In a competitive environment, banks are providing more loans by easing credit standards, resulting in more bad loans on banks' balance sheets (Ashraf, 2018; Bushman & Williams, 2015). Regarding this problem, the literature shows that bank transparency can provide market participants with a basis for exerting pressure on banks' supervisory authorities to intervene quickly in troubled banks, mitigate the risk of panic by reducing the uncertainty of depositors and other short‐term lenders about the creditworthiness of some banks and reducing the financing constraints on banks seeking to raise capital in response to negative balance‐sheet shocks (Bushman & Williams, 2015; Manganaris, Beccalli, & Dimitropoulos, 2017; Ratnovski, 2013). Policymakers should pay greater attention to changes in accounting standards that ensure transparency in this sector.…”

Section: Conclusion and Policy Implicationsmentioning

confidence: 99%

On the nexus of innovation, trade openness, financial development and economic growth in European countries: New perspective from a GMM panel VAR approach

Mtar

Belazreg

2021

Int. J Fin Econ

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This paper examines the four-way linkages between innovation, trade openness, financial development and economic growth using panel-VAR approach for 11 European countries over the period 2001-2016. Most importantly, the findings revealed that there is a unidirectional relationship between economic growth and financial development, between trade and economic growth and between innovation and financial development. The findings also revealed a negative relationship between innovation and economic growth and between trade and economic growth. The paper concludes that further regulation of financial systems and the quality of funding are important ingredients to foster economic development. The paper also concludes that country-specific characteristics can play an important role in fostering innovation and productivity. Furthermore, policymakers should improve institutional quality and improve the regulatory environment in order to benefit more from trade openness. Also, policy makers need to use innovation incentives for local companies in order to counteract the negative effects induced by market opening.

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“…Bank liquidity theories are mostly developed in partial perspectives, e.g. crisis context (Acharya et al , 2011; Dijk, 2017), the role of transparency (Ratnovski, 2013), relationship with money market (Heider et al , 2015) and impact to financial stability (Diamond and Kashyap, 2016). A simple general theory of bank liquidity recently has been proposed by Tirole (2011), and another is under development by Calomiris et al (2015).…”

Section: Literature Reviewmentioning

confidence: 99%

“…Bank liquidity theories are mostly developed in partial perspectives, e.g. crisis context (Acharya et al, 2011;Dijk, 2017), the role of transparency (Ratnovski, 2013), relationship with money market (Heider et al, 2015) and impact to financial stability Banks' liquidity management dynamics 5.00 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10.00 15.00 20.00 25.00 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 -1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 Banks' liquidity management dynamics (Diamond and Kashyap, 2016). A simple general theory of bank liquidity recently has been proposed by Tirole (2011), and another is under development by Calomiris et al (2015).…”

Section: Literature Reviewmentioning

confidence: 99%

“…The reserves would reduce the risk and cost of having to liquidate assets earlier to repay withdrawals. Ratnovski (2013) emphasizes this notion through a theoretical model in which liquidity reserve and assets transparency (a form of signaling) could synergize. He acknowledges, however, transparency is not a substitute for liquidity reserve and without regulatory requirement; banks could end up in bad equilibrium: inadequate amount of both reserve and transparency.…”

Section: Literature Reviewmentioning

confidence: 99%

See 1 more Smart Citation

Banks’ liquidity management dynamics: evidence from Indonesia

Ariefianto

Trinugroho

Lau

et al. 2021

IJOEM

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PurposeThis study aims to cover an important yet largely under-explored topic: the dynamic process of bank liquidity management in a vast developing economy by considering pool of funds hypothesis, signaling hypothesis and risk management hypothesis.Design/methodology/approachThe authors apply the dynamic common correlated effect (DCCE) method with an error correction model format to a long panel datasets of 84 Indonesian banks from January 2003 to August 2019, resulting in 16,800 observations.FindingsThe authors obtain convincing evidence of dynamic liquidity management with an error correction mechanism. The time needed to adjust to a liquidity shock ranges from 2.5 to 3.5 months. The empirical results strongly support the pool of funds and signaling hypotheses, whereas risk management motive appears to have secondary importance.Practical implicationsThe regulator should also encourage banks to diversify liquidity management to include interbank money market and off-balance-sheet instruments. The current condition shows that bank liquidity management is strongly correlated with intermediation dynamics and thus is contracyclical. Banks could end up with tight liquidity in a booming economy, which would pose a severe risk to their financial standing.Originality/valueTo authors’ knowledge, this study is the first to analyze bank liquidity management behavior empirically using a panel error correction mechanism. Here, the authors also try to combine a practitioner perspective with a scientific one.

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Liquidity and Transparency in Bank Risk Management

Cited by 4 publications

References 31 publications

Performance Evaluation Model of Short-Term Mutual Funds Based on Return-Variance-Liquidity

Performance Evaluation Model of Short-Term Mutual Funds Based on Return-Variance-Liquidity

On the nexus of innovation, trade openness, financial development and economic growth in European countries: New perspective from a GMM panel VAR approach

Banks’ liquidity management dynamics: evidence from Indonesia

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