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International Banking - Essay Example

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International Banking

Measuring bank liquidity risk incorporates the comparison of accumulated expected cash shortfalls for a given period of time with the stock available for funding the cash sources. In accounting, the stock or the asset available in an organization should always be sufficient to fund the financial sources. To measure this risk, the accountant is required to assign the anticipated cash flows to periods in the future that have financial products with unpredictable cash flow timings (Musakwa, 2013). It is important to note that there is no agreed criterion that can be used to assign the cash flows. In other words, there is no common consensus on how to carry out the procedures. The variations in measuring funding liquidity risk are normally caused by the considerations of solvency, immediacy, as well as the cost of obtaining liquidity. First, solvency can only be applied in firms that are solvent. It can be defined in terms of funding liquidity risk as the capability of a firm that is solvent to make the payments agreed upon in a timely manner. It should be noted that not only solvent banks that are liquid (Musakwa, 2013). At times, even insolvent banks may be liquid and this makes it difficult to use solvent as the main base for measuring banks liquidity risk. Further, a solvent bank can at times be illiquid. Insolvent banks may for instance be liquid in the event of information asymmetry. Such a situation may arise where the bank is fully aware of its solvency status but the public has no clue regarding the same. The distinction between solvency and funding liquidity risk is easy especially in the events of crises capped with information asymmetry. But it should be noted that solvency is normally covered by capital while ion the other hand funding liquidity risk is covered by cash inflows (Ruozi & Ferrari, 2012). Cost of obtaining liquidity is also likely to cause variations in bank liquidity risk. In most cases, funding is obtained with the main objective of covering obligations (Matz & Neu, 2007). However, it has to be obtained at an additional cost. The additional cost happens to be the major concern of accountants. In fact, some definitions of funding liquidity risk are based on this cost. For instance, the term funding liquidity risk could be defined as “the risk that a financial firm, though solvent, either does not have enough financial resources to allow it to meet its obligations as they fall due or can obtain such funding only at excessive cost” (Musakwa, 2013). This definition describes the cost of liquidity in in subjective terms. The defect of the definition is that the costs differ from market to market as well as across various banks. Under this concept, the bank liquidity risk is measured basing in the additional cost for obtaining the funds (Davis, 2004). Finally, the immediacy is an important aspect of funding liquidity risk. It defines the speed with which a bank can be in apposition to meet its obligations. In measuring funding liquidity under this concept, the time frame within which the bank is likely to become unable to meet its obligations is estimated (Hlatshwayo, et al. 2013). As mentioned earlier, known regarding the distribution of run off profile in most financial products for banks. However, there is an increased need for establishing a reliable method of measuring bank liquidity risk so as to avoid bank crises. In essence, the measure of bank liquidity ri ...Show more
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International Banking How to measure bank funding liquidity risk and market liquidity risk Banks over the years have been faced with crises emanating from various factors. A major player that has historically been associated with these crises is the funding liquidity risk…
International Banking
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