Liquidity risk is the inability of a bank to accommodate decreases in liabilities or to fund increases in assets. Liquidity risk arises from the primary role of banks in the maturity transformation of short-term deposits into long-term loans (Baltensperger, 1980; Crosse and Hempel, 1980; Diamond and Dybvig, 1983; Prisman, Slovin and Sushka, 1986; Dewatripont and Tirole, 1994; Myers and Rajan, 1998; Swank, 1996; Strivasta, 2003; Strahan, 2006; Rochet, 2008; Moore, 2010).
Traditionally, liquidity risk was measured by using different liquidity ratios. Bank liquidity and illiquidity measures can be calculated from the balance sheet positions of banks. Initially, the loan-to-deposit ratio was used to measure bank illiquidity (Saunders and Cornett, 2007). Several ratios were considered to measure liquidity and took the form of readily marketable assets as a percentage of total assets; volatile liabilities as a percentage of total liabilities; readily marketable assets as a percentage of volatile liabilities; readily marketable assets as a percentage of all deposit type liabilities; and interbank loans as a percentage of interbank deposits. However, Poor and Blake (2005)‟s study reached the important conclusion that it was not enough to measure liquidity by using liquidity ratios. The case in point was South East Bank of Miami which failed due to liquidity risk but had used in excess of 30 liquidity ratios to measure liquidity. Furthermore, Shen et al. (2009) show that beyond sheer liquidity ratios, there is need for banks and researchers to develop new methods of liquidity measurement. The various measurements of bank liquidity and liquidity risk beyond liquidity ratios are summarised in table 1.1.
LIQUIDITY RISK MANAGEMENT BY ZIMBABWEAN COMMERCIAL BANKS
18 Table 1.1: Alternative Measures of Liquidity Risk
Study Method of Measuring Liquidity Risk
Bank for International Settlements (2000) Maturity laddering method
Saunders and Cornett (2006) Sources and uses of liquidity; peer group
ratio comparisons; liquidity index; financing gap and financing requirement; liquidity planning Matz and Neu (2007) Balance sheet liquidity analysis; cash
capital position and maturity mismatch approach Shen et al. (2009) Financing gap ratio
Vivian et al. (2009) Liquidity planning
Schertler (2010) Stock and cash-flow mapping approach
Source: Reviewed Literature
Based on previous studies, different variables have been found to determine liquidity risk. Table 1.2 below presents a typology of previous research on liquidity risk determinants. Table 1.2: Various Liquidity Risk Determinants
Study Country Variables
Agenor et al. (2004) Thailand (i) lagged values of the ratio of excess reserves to deposits
(ii) current and lagged values of the ratio of required liquid assets
(iii) ratio of required liquid assets to total bank deposits
LIQUIDITY RISK MANAGEMENT BY ZIMBABWEAN COMMERCIAL BANKS
19 (iv) current and lagged values of the coefficient of variation of the cash-to- deposit ratio
(v) deviation of output from trend
(vi) current and lagged values of the discount rate
Fielding (2005) Egypt (i) the level of economic output (+) (ii) discount rate (+)
(iii) reserve requirements (?) (iv) cash to deposit ratio (-)
(v) rate of depreciation of the black market exchange rate (+)
(vi) impact of economic reform (-) (vii) violent political incidents (+) Aspachs and Tiesset
(2005)
England (i) probability of obtaining support from the lender of last resort, which should lower the incentive for holding liquid assets (-)
(ii) interest margin as a measure of opportunity costs of holding liquid assets (-) (iii) bank profitability, which, according to finance theory, is negatively correlated with
LIQUIDITY RISK MANAGEMENT BY ZIMBABWEAN COMMERCIAL BANKS
20 liquidity (-)
(iv) loan growth, where higher loan growth signals an increase in illiquid assets (-); (v) size of bank (?); gross domestic product as an indicator of business cycle (-)
(vi) short term interest rate, which should capture the monetary policy effect (-).
Karcheva (2007) Ukraine (i) assets
(ii) highly liquid assets (iii) government securities (iv) troubled loans
(v) non-working assets (iv) balance capital (v) current liabilities (vi) household deposits
Lucchetta (2007) Europe (i) behaviour of the bank on the interbank market and a positive relationship attained. (ii) monetary policy interest rate was included as a measure of a bank‟s ability to provide loans to its customers.
LIQUIDITY RISK MANAGEMENT BY ZIMBABWEAN COMMERCIAL BANKS
21 (iii) share of loans on total assets and share of loan loss provisions on net interest revenues, were both taken as a measure of risk-taking behaviour.
(iv) bank size was measured by logarithm of total bank assets.
Bunda and Desquilbert (2008)
Emerging
countries
(i) total assets as a measure of the size of the bank (-)
(ii) the ratio of equity to assets as a measure of capital adequacy (+)
(iii) the presence of prudential regulation, which means the obligation for banks to be liquid enough (+)
(iv) the lending interest rate as a measure of lending profitability (-)
(v) the share of public expenditure on gross domestic product as a measure of supply of relatively liquid assets (-)
(vi) the rate of inflation, which increases the vulnerability of banks to nominal values of loans provided to customers (-)
(vii) the realisation of a financial crisis which could be caused by poor bank
LIQUIDITY RISK MANAGEMENT BY ZIMBABWEAN COMMERCIAL BANKS
22 liquidity (-)
(viii) the exchange rate regime
Rauch et al. (2009) Germany (i) monetary policy interest rates, where they tighten monetary policy, reduce bank liquidity (-)
(ii) level of unemployment, which is connected with demand for loans (-)
(iii) savings quota (+)
(iv) level of liquidity in previous period (+) (v) size of bank measured by total number of bank customers (-)
(vi) bank profitability (-)
Shen et al. (2009) 12 Advanced Economies
(i) size
(ii) square of size
(iii) less risky liquid assets (iv) risky liquid assets
(v) external funding dependence (vi) supervisory power index (vii) private monitoring index
(viii) overall bank activities and ownership restrictiveness
LIQUIDITY RISK MANAGEMENT BY ZIMBABWEAN COMMERCIAL BANKS
23 (ix) annual percent change of GDP
(x) lagged variable of annual percentage change in GDP
(xi) inflation
Moore (2009) Latin America (i) coefficient of variation of the cash-to deposit ratio
(ii) output to trend output ratio
(iii) the coefficient of variation of the output to trend output ratio
(iv) money market interest rate Schertler (2010) Germany (i) change in payment obligations
(ii) change in payment obligations lagged (iii) assets
(iv) lagged interest margins (v) lagged regulatory capital Vodova (2011) Czech
Republic
(i)share of own capital on total assets of the bank (+)
(ii) share of non-performing loans on total volume of loans provided by the bank (-) (iii) return on equity: the share of net profit
LIQUIDITY RISK MANAGEMENT BY ZIMBABWEAN COMMERCIAL BANKS
24 on own capital of the bank (-)
(iv)logarithm of total assets of the bank (+/-) (v)dummy variable for realisation of financial crisis(-)
(vi)growth rate of gross domestic product (-) (vii) inflation rate (+)
(viii) interest rate on loans (-); interest rates on interbank transactions (-)
(ix) difference between interest rates on loans and interest rates on deposits (-) (x) monetary policy interest rates (-) (xi) unemployment rate (-)
Source: Reviewed Literature
The studies summarised above show that commercial banks‟ liquidity is determined by bank-specific factors, macroeconomic factors and supervisory factors. An important task is to choose appropriate explanatory variables. Consideration needs to be given to whether the use of a particular variable makes sense for the case country‟s conditions. Other considerations include the availability of data.