Theoretical Overview of Factors Affecting Commercial Bank Liquidity

With this evidence, managers will be able to assess the factors and the level of impact on liquidity, thereby proposing policies and measures to improve the liquidity of commercial banks in Vietnam. In particular, the study has conducted a new content, which is to analyze the impact of the ratio of medium and long-term loans to total loans on liquidity at Vietnamese commercial banks. This is one of the bases for assessing and recommending policies for commercial banks as well as the State Bank.

1.6. Thesis structure

This research paper is divided into 5 parts: Chapter 1: Overview of the research problem

Chapter 2: Theoretical overview of factors affecting liquidity of commercial banks

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Chapter 3. Analysis of factors affecting liquidity of Vietnamese commercial banks

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Chapter 4. Research data and results Chapter 5. Conclusions and policy recommendations

CHAPTER 2: THEORETICAL OVERVIEW OF FACTORS AFFECTING THE LIQUIDITY OF COMMERCIAL BANKS

2.1. Liquidity of commercial banks

2.1.1. Concept of liquidity

From an asset perspective, liquidity is understood as the ability to convert assets into money and vice versa, measured through conversion time and conversion costs. For commercial banks, liquidity is understood as the ability of banks to immediately fulfill financial obligations arising during operations such as: payment needs, deposit withdrawals, payment needs, disbursement of loans according to customer credit agreements, etc.

The Basel Committee on Banking Supervision states: “Liquidity is a specialized term referring to the ability to meet the needs of using available capital to serve business activities at all times such as paying deposits, lending, payments, capital transactions...”.

At different times, Basel has had different concepts and emphases on liquidity, but in general, liquidity is defined as the ability to increase asset funds and meet maturing obligations at acceptable costs.

In 2010, in the Commercial Banking Management textbook, Truong Quang Thong stated: “Liquidity is the ability to convert an asset into cash quickly, at the lowest possible cost. More fully, based on both asset and capital approaches, liquidity is the ability to access assets and capital at a reasonable cost to serve the different operational needs of the bank”.

According to Duttweiler (2009), liquidity is the ease with which a particular asset can be converted into cash and when the bank wants to convert that asset into cash, the market is still able to accept the transaction.

Thus, the liquidity of commercial banks is considered as the immediate ability to meet the demand for deposit withdrawals and disburse committed credits.

Bank liquidity can be divided into two types: natural liquidity and artificial liquidity. Natural liquidity is created from the bank's assets that have a prescribed maturity. Artificial liquidity is created through the ability to convert assets into cash before the maturity date.

2.1.2. Liquidity status

2.1.2.1. Liquidity supply

Liquidity supply is the source of capital provided by banks to increase payment capacity to meet liquidity demand. These are the available or possible short-term amounts of commercial banks, including:

Deposit mobilization: This can be considered the most important source of supply because deposit mobilization accounts for the largest proportion of total liquidity supply and is also the easiest source of supply to create.

Repaid loans: This is also one of the important sources of liquidity management of a commercial bank. The amount of money repaid from lending activities helps the bank to have money to reinvest or reserve to serve business activities.

Revenue from providing products and services: In the past, revenue from services accounted for a low proportion and was often not paid attention to, but in recent years, along with the development of technology, the habit of not using cash..., as well as the promotion of service activities, diversification of revenue sources, revenue from services has been given due attention and oriented to develop into one of the important sources of revenue for any bank in the future.

Money market loans: These are urgent temporary supplies to meet the liquidity needs of banks, money market loans include interbank loans or rediscount loans from the central bank.

Asset sales: This is a measure to increase liquidity supply when the above measures cannot be used. Commercial banks will sell in order from highly liquid assets to less liquid assets to meet liquidity needs.

2.1.2.2. Liquidity demand

Liquidity demand is the impact that reduces the bank's funds to meet payment obligations during operations. Liquidity demand includes:

Withdrawal of customer deposits: this is a regular and irregular demand, especially for non-term deposits, which account for the largest proportion of liquidity demand. Banks will face difficulties when the demand for withdrawals suddenly increases with large amounts of money.

Loans arising: lending activities play an important role for all commercial banks in Vietnam, therefore the need for money supply from committed or newly arising loans also arises constantly.

Payments Loans payable: These are loans in the market

money

Operating expenses: arising from actual business operations.

Banks such as paying salaries, bonuses to employees, operating costs...

Pay dividends to shareholders.

2.1.2.3. Liquidity status

The combination of a bank's liquidity supply and demand will create its Net Liquidity Position (NPL), which is defined as follows: NPL = Total Liquidity Supply - Total Liquidity Demand

If NPL > 0 or liquidity supply is greater than liquidity demand, in this state, the bank has a liquidity surplus. This shows that the bank's current liquidity is very good, but on the other hand, it also shows that the profitability of assets has not been fully exploited. It could be due to subjective reasons such as banks proactively increasing liquidity reserves, unreasonable investment, or due to objective reasons such as the inefficient operation of the economy, which does not have many investment opportunities, or due to capital growing too quickly... Operators need to use this surplus for investment to bring about efficiency before they are used to meet future liquidity needs.

If NPL < 0 or liquidity supply is less than liquidity demand, in state

This means that the bank is having a liquidity deficit. Liquidity deficit is one of the risk factors for the operation of commercial banks. A small deficit makes it difficult for banks to operate, while a large deficit can lead to more serious problems such as losing customers, losing business opportunities, losing markets, reducing public confidence, etc. (Truong Quang Thong, 2010). Necessary actions to compensate for liquidity include: selling illiquid assets, using required reserves, borrowing from interbank funds, borrowing from the central bank for rediscounting, etc.

If NPL = 0 or liquidity supply equals liquidity demand, the bank is in a state of liquidity equilibrium. This is the goal of bank managers but in reality it is very difficult to happen.

2.1.3. Liquidity risk

2.1.3.1. Concept of liquidity risk

According to Duttweiler (2009), liquidity risk of a commercial bank appears when at any point in time the bank is unable to pay, or has to pay by mobilizing capital sources at high costs, which can lead to negative impacts for the commercial bank.

In 2006, the Basel Committee classified liquidity risk into two types: funding liquidity risk and market liquidity risk. Funding liquidity risk is the risk that a bank is short of money and cannot raise new funds to meet its payment obligations when they fall due. Market liquidity risk is the risk that a bank cannot sell assets on the market in a short period of time at low cost.

Thus, liquidity risk is the risk that occurs when a commercial bank is unable to fully meet the cash demand for immediate liquidity, or can meet it but at too high a cost. In other words, this is the risk of a commercial bank in the case of lack of payment capacity due to insufficient cash reserves, failure to convert assets into cash in time, or inability to borrow to meet the requirements of payment contracts.

2.1.3.2. Causes of liquidity risk

According to Nguyen Van Tien (2010), the causes of liquidity risk are divided into two types: antecedent causes and operational causes.

nnnn includes three main causes:

“First, banks raise and borrow funds for short periods, then roll them over to lend for longer periods. As a result, many banks face a mismatch in the maturity of their assets and liabilities.”

“Second, the sensitivity of financial assets to changes in interest rates. When interest rates rise, many depositors will withdraw their money to look for other places to deposit with higher interest rates. Those who need credit will postpone, or withdraw all of their agreed low-interest credit lines. Thus, changes in interest rates simultaneously affect the flow of deposits as well as the flow of loans, and ultimately the liquidity of the bank.”

“Third, banks must always meet liquidity needs perfectly. Liquidity problems will erode public confidence in banks.”

Risks are the causes based on the origin of the risk, which can arise from the liability side when the depositor suddenly withdraws money in large amounts or from the asset side when the customer withdraws money according to the loan agreement signed with the bank.

The cause of the debt side: arises from the customer depositing money and suddenly withdrawing money, causing the bank to have difficulty with liquidity. Because cash is the most liquid asset but does not generate profit, the bank will limit the amount of cash to the lowest possible level, and use this money to invest in assets with higher profitability but less liquidity to increase profits, so most of the bank's money exists in an illiquid form.

When depositors suddenly need to withdraw a large amount of money, the bank will not have enough cash to pay, the bank is forced to seek additional capital sources immediately through interbank loans, bank rediscount loans.

The central bank or the sale of less liquid assets that it is holding..., selling a large volume of assets immediately will cause the bank to be forced to sell at a much lower price than the actual price. A worse case is when many banks are short of liquidity and have to sell assets, they may not be able to sell the assets on the market. This is the risk that arises from the debt asset side.

Causes of arising from assets: When the borrower needs to disburse immediately according to the loan commitments signed with the bank, the bank must ensure that there is enough money to fulfill the commitments. If there is not enough liquidity immediately, the bank is forced to use measures similar to ensuring liquidity arising from assets. This can cause liquidity risks.

2.1.3.3. Impact of liquidity risk

For commercial banks:

Liquidity risks will cause financial losses for commercial banks, because banks will have to compete to mobilize capital with high interest rates, increasing costs, leading to an increase in lending interest rates, meaning that banks will have more difficulty lending. When revenue is not enough to meet costs, it will lead to losses for commercial banks.

At the same time, failure to meet withdrawal or disbursement needs for credit facilities will reduce the bank's reputation, especially causing a loss of confidence among depositors. People's lack of confidence in the bank's solvency will cause a mass withdrawal, leading to serious loss of liquidity and possible bankruptcy.

For the commercial banking system and the economy:

When liquidity risks arise, commercial banks will increase their deposit interest rates, and people's deposits in banks will increase, leading to a shortage of investment capital in the economy. At the same time, high lending interest rates will strongly impact business operations, leading to high prices, high inflation, affecting people's lives as well as reducing the growth scale of the economy.

A bank with serious liquidity loss will create a chain reaction that breaks public confidence in the banking system, the phenomenon of mass withdrawals will spread through different banks, leading to the collapse of the entire banking system and the economy.

2.1.4. Liquidity measurement

Vodova (2011) proposed two methods to measure liquidity: measuring by liquidity gap and measuring by liquidity ratios.

The liquidity gap method is a method of measuring the difference between current and future capital and assets.

The method of measuring by liquidity ratios is a method of calculating different indicators collected from balance sheet data to predict liquidity developments; these ratios include: the ratio of liquid assets to total assets, the ratio of liquid assets to total deposits and short-term mobilized capital, the ratio of total outstanding debt to total assets and the ratio of total outstanding debt to total deposits and short-term mobilized capital.

2.1.4.1. Liquidity gap measurement method

For bank managers, they often pay attention to two items: average total outstanding loans and average total mobilized capital. Most loans will be liquidated by deposits. When lending, banks often prioritize funding for long-term loans with higher profits, but these loans have low liquidity, while deposits are mostly short-term. When there are many large-value deposit withdrawals at the same time and without prior notice, it can cause a loss of liquidity for the bank. The liquidity gap is the difference between the average total outstanding loans and the average total mobilized capital.

Formula for calculating liquidity gap:

Liquidity gap = Average total outstanding loans - Total capital

average mobilization

Liquidity gap is a warning sign of liquidity risk in

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