A Study On The Liquidity Risk Management Of Commercial Banks

The financial crisis caused by the subprime mortgage crisis in2007has raised the liquidity risk management issue to an unprecedented level and make it the common concern and research focus in management and academic circle. Certain controversies exist in relevant studies on the liquidity risk of China’s commercial banks and the influence of the implementation of Basel III upon the liquidity risk management of China’s commercial banks. This paper, based on review of relevant literatures, reveals that:the systematically theoretical analysis on the background and significance of the liquidity risk management enhancement by Basel III is rarely conducted, and the status quo of liquidity risk of China’s commercial banks and the difference of liquidity risk among different commercial banks on basis of the new management framework stipulated in Basel III is also rarely studied.Given this situation, the following questions are proposed in this paper:why did some financial institutions whose capital adequacy ratio meets the management requirements still fall into liquidity plight? As for the international uniform management indicators stipulated by Basel III:liquidity coverage ratio and net stable funding ratio, what reform philosophy and thinking are contained behind these two seemingly simple indicators? The existing liquidity indexes show that the situation of liquidity risk of China’s commercial banks is generally better than that of European and American banks. Nevertheless, will the calculation result be still optimistic when applying the new index system stipulated under Basel III framework? In addition, is there any significant difference of liquidity risk among different types of commercial banks? With the introduction and implementation of Basel III, what kind of challenges will China’s commercial banks be confronted with in the liquidity risk management?Based on the contemplation upon the above-mentioned questions, both domestic and foreign relevant literatures are reviewed and systematical presentation and theoretical analysis on the background under which Basel III greatly strengthens liquidity risk management of commercial banks are conducted. Comparative analysis on difference of quantitative methods of liquidity risk under traditional commercial bank practice and under Basel Agreement framework is carried out. On this basis, quantitative analysis on liquidity risk of different commercial banks in China is conducted by combining traditional index and new index specified under Basel III framework, the comparison of liquidity between China’s commercial banks and American sample banks is made, the existence of liquidity risk and its difference among different banks under designed stress situations is verified, and the challenges and reform trend of liquidity risk management of China’s commercial banks are discussed.Research results show that:in general, the liquidity index of China’s main listed commercial banks meets the management standards stipulated by China Banking Regulatory Commission and the liquidity level is generally higher than that of American sample banks. Nevertheless, there is the risk of liquidity scarcity for China’s commercial banks as a whole. Under stress situations such as central bank’s reserve fund and capital decrease, the liquidity of China’s commercial banks will decline, which may result in the breakout of liquidity risk.The situation of liquidity risk of different commercial banks in China shares great differences. What is more prominent is that urban commercial banks fall to reach the minimum requirements of liquidity coverage and net stable funding ratio specified under Basel III framework. In addition, the issue of maturity mismatching of assets and liabilities in small and medium banks including urban commercial banks stands out, which brings higher potential of liquidity risk. With the introduction and implementation of liquidity risk management framework under Basel III, China’s commercial banks are facing new challenges and reforms in the liquidity risk management.The innovation of this paper:systematic representation and theoretical analysis of the background of liquidity risk management enhancement by Basel III. Based on comparative analysis of the difference of quantitative methods of liquidity risk management under traditional commercial bank practice and under new Basel Agreement framework, quantitative analysis is conducted for China’s different commercial banks and American sample banks by using latest data and liquidity risk under designed stress situations is tested.