The Bank Credit Analysis Handbook by Jonathan Golin & Philippe Delhaise

Author:Jonathan Golin & Philippe Delhaise
Language: eng
Format: epub
Publisher: Wiley
Published: 2013-03-12T04:00:00+00:00

Chapter 10

Liquidity

[L]iquidity . . . is at the core of banking. Credit institutions typically transform short-term, liquid liabilities into long-term, illiquid assets. In so doing, banks allow customers to smooth out their consumption and investment patterns. . . . In providing this important economic function, banks protect their customers against liquidity problems, but—at the same time—become exposed to such risks themselves. In an extreme case . . . runs, even on sound banks [may occur] when customers withdraw their deposits on a massive scale.

—European Central Bank1

Lack of access to funding sources and weak liquidity management are typical factors that lead to bank failures.

—Dominion Bond Rating Services2

Banks are machines for taking liquidity risk [borrowing] short-term deposits and [making] long-term loans. . . . [T]he credit squeeze has proved that liquidity has been forgotten in the quest to regulate banks’ capital.

—Financial Times, Editorial3

Liquidity is arguably the most difficult attribute for a bank analyst to explore. Not only are there myriads of possible ratios, each one offering its own reading of a bank’s liquidity profile, often at odds with that provided by the other results, but a bank’s liquidity changes by the minute.

If seasoned analysts and competent regulators can barely agree on near-universal grounds to pass judgment, retail depositors—and even sophisticated investors—often remain in the dark until it is too late. Worse yet, even when it is not too late, any panic contributes to shorten the life of a financial institution.

In a pivotal scene in Frank Capra’s classic 1946 film, It’s a Wonderful Life, a bank run is brewing in a small American town.4 The protagonist, George Bailey, played by James Stewart, has just married his childhood sweetheart, and the couple is headed for their honeymoon. En route to the train station, George sees a crowd advancing toward the Bailey Building & Loan Association, a modest single-branch savings institution that he reluctantly took over on his father’s death. Jumping out of the taxi, George rushes into the building just ahead of the panicked depositors. He soon learns that Uncle Billy, the institution’s bumbling accountant, has misplaced $8,000 in cash. No funds remain to pay the anxious depositors, who now stand before George demanding their money back.5

With the Bailey Building & Loan Association on the brink of collapse, George makes a last-ditch effort to save the savings and loan.6 Imploring his customers to believe in the bank, he tells them, “You’re thinking about this place all wrong, as if I have the money back in the safe.” Then, in a sentence that encapsulates the essence of fractional reserve banking, he continues: “[Y]our money’s in Joe’s house and in Mrs. Maitland’s house and a hundred others. . . .” His impassioned appeal, together with the US$2,000 that would have paid for the honeymooners’ sojourn, saves the day. George proceeds to negotiate partial withdrawals with most of his depositors, regains their confidence, pacifies the bank examiner, and keeps the institutions’ doors open until the end of banking hours and, the film implies, happily ever after. While

Download

Copyright Disclaimer:
This site does not store any files on its server. We only index and link to content provided by other sites. Please contact the content providers to delete copyright contents if any and email us, we'll remove relevant links or contents immediately.