Strengthening the process to increase assets efficiency of the banking sector and to resolve the liquidity risk became main targets in all countries over the world, especially after the financial crisis witnessed in 2007/2008.However, in order to achieve these aims, BCBS published in December 2010 a new international regulatory framework identified under Basel III and consists of four new perils. This new framework aims to enhance the structure and systematic mechanisms to manage and avoid risks faced by banking systems during the crisis (BCBS, 2010).Furthermore, the Liquidity management is one of these perils that introduced to retain stability in banks through the capacity of these banks to reserve increments in assets in order to meet its obligations without acquiring unsuitable distress and to avoid facing Liquidity Risk (Vodov'' 2011). Given the importance of bank's liquidity risk and its possible impact on bank's profitability, this thesis aims at identifying the determinants of the liquidity for the Jordanian banking sector. More specific, the thesis examine the factors that may affect the liquidity coverage ratio (LCR), which is the measure of bank's liquidity over short time periods.
Further, basel III is a new upgrade of basel II, especially that basel II lacked additional requirements in the interior policy related to find framework that maintain adequate ratios of liquidity during the crisis, which caused shortage of funds to recover the shortcomings. In that time banks committed to offer some of their illiquid-assets, which turned out to be less appealing as source of liquidity with discounted prices (Holmstrdm and Tirol, 1998). Hence, the need raised for more empowered framework that preserve the availability of proper levels of liquid assets within stress periods and using such assets so as not to reduce over the time.
While liquidity is one of basel III perils, it consists of two ratios. First, the Liquidity Coverage Ratio (LCR), which activated partially at the beginning of 2015.It focuses on the capacity to keep up satisfactory liquidity availability for emergency cases of up to 30 days. However, this will be supplemented by the second liquidity ratio that called Net Stable Funding Ratio (NSFR) that will guarantee stability for banks over a year by insuring the availability of funding resources during the stress periods and without incurring losses. Both ratios will cover the defensive plan against Liquidity Risk. Thus; Basel III went for setting these new worldwide rules to address both firms in particular and general systemic risks by raising the nature of funding (Amediku, 2011).So at the beginning of 2019, Banks officially are required to evaluate the execution of their operations against the prerequisites of Basel III. Whereas, this will safeguard the clients and economies in order to minimize the level of risk (Mardini, 2013).
Given the importance of the liquidity risk to the banking sector and thus for the whole economy, many empirical studies examined the determinants of this risk with a particular focus on developed countries. For example Bonfim & Dai (2014), Hatfield & Lancaster (2000) examined this issue for the banking sector and financial institutions in US and thirty three of major holding companies (BHCs). Moreover, Cucinelli (2013) examined the determinants of LCR for Euro Banks for example. However, there is a few studies that examined this issue in emerging markets such as Vodov'' (2013), who analyzed hungarian commercial banks. Therefore, this thesis extends this line of research by providing a new evidence from Jordan, which consider part of the emerging market in the Middle East and North Africa (MENA).
Most MENA countries classified as emerging markets ,because they are late in developing their markets and economic growth, this refer to many reasons such as, the weak trading volumes and low levels of foreign investors attractiveness (Zaher,2007). In other words, in emerging markets we can notice that the concerned parties who are fully controlling the market are directly related to a private sector and consist of a few family members, and due to this structure we have a limited number of investors owning the listed companies (Lines, 2003). Further, listed constructions characterized with holding high liquid assets (Skully, 2012), which facilitates their business activities and prevent further chances for new investors to take their chances in developing these markets. In addition; the unstable political situation which play significant role and affect the economic situation of MENA countries ;where Stock markets and economic situation are not as reliable and stable as it should be in order to insure the availability and accuracy of the stocks pricing, which affect investors trading trends (Cumming et al.,2011).However, all these factors lead for fluctuations in the economic situation in MENA region ,and as a result they affect the financial systems and the banking sectors due to their relation with the economic situation (Rousseau & Sylla,2003).Therefore Jordan is our target country.
Furthermore, what recognized this thesis from other researches related to LCR determinants; that before 2015 all details about how to calculate the Liquidity Coverage Ratio and assets classifications were not disclosed by Basel Committee. Whereas, this study fully covered the required variables to preciously measure the liquidity coverage ratio according to Base III requirements. Thus, all previous studies used approximate ratios to measure LCR values, such as the Liquidity Balance Ratio (LB) used by Hann and End (2012), to measure banks liquidity. Also, Kutum and Hussainey (2014) study, who assessed the measurement of LCR value, through dividing assets by liabilities by.
1.2 Problems of the study:
Jordan was one of the committed countries in applying Basel II, and now it's a new challenge for it to apply Basel III regulations, which came with two main basic liquidity ratios; LCR and NSFR. In order to manage the liquidity risk for short and long time periods. Furthermore, this study focuses on LCR as one of those ratios, by investigating the following:
' Does the banking sector in Jordan comply with the Liquidity Coverage Ratio? , through measuring LCR value for fifteen listed Jordanian banks, and assessing their liquidity status as introduced by Basel III requirements. While, banks all over the world will not be obligatory started to apply this measure before 2019.
' What are the determinants of banks liquidity measured by LCR? , by considering set of internal structure variables such as, bank specialization, bank capitalization and loan loss reserve ratio. In addition, the study included another external variables that are inflation rate and gross domestic product.
1.3 Importance of the Study.
The purpose of this thesis is to examine the determinants of liquidity coverage ratio for the Jordanian banks. Thus, the results at this thesis will be with general importance for different parties such as researchers, practitioners and regulators. More especially; this will help these banks in identifying which are the factors that should be taken into consideration when identifying the proper laws or findings at liquidity, that are required to meet short term obligations. Furthermore; the results of this thesis will also help regulators, mainly the central bank at Jordan to identify to which extent the Jordanian banks have adhered to the application at LCR ,and whether further regulations are required to ensure the good performance of the banks in terms of meeting their liquidity needs .As well as, the importance of this study also come from the fact that it gives a clear indication to the Jordanian banks regard the type and quality of assets used to ensure the required level of liquidity. That is, testing the liquidity coverage ratio using the Basel III requirements requires calculating the amounts of different groups of assets as the committee classified them, which should be held by the banks in order to get the exact amount of the ratio.
1.4 Objectives of the study:
The main Objective of this study is to examine some internal and external factors that are expected to have impact on the liquidity risk for the Jordanian banking sector over short terms. On the other hand, this will be examined by using LCR to measure liquidity. In addition, this study will measure LCR values, so we can analyze and identify the current performance of Jordanian Banks to offset the liquidity risk.
Chapter two
Literature and previous studies
2.1 What is Basel?
National bank governors of the G10 nations built up a Committee on Banking Regulations and Supervisory Practices toward the end of 1974 known as, the Basel Committee on Banking Supervision. They act through the role of their central banks in addition to their privileges with formal responsibility for the hedging supervision of banking business. Further, this Committee was composed as a gathering for standard collaboration between its members to upgrade money related security, by enhancing supervisory expertise and the nature of managing account supervision around the world (BIS, 2014). This could be done through setting rules for the regulation and supervision of banks and sharing supervisory issues, systems and methodology to lift fundamental recognition,also to upgrade cross-edge coordinated effort. In addition, to exchange information to enhance the liquidity part and budgetary markets to recognize present or expected perils for the overall financial structure.
While countries that are part of the committee have to oblige with the regulations and requirements it assume, applying the committee's decisions by the non-participant countries has no legitimate force to commit. Nevertheless, because of the arranged supervisory measures, guidelines and recommends sound practices, it was mandatory to control the financial sector of these non-participant countries using the guidelines proposed by the committee, to improve the adaptability of the overall sparing cash system, development of trusted hedging proportions and playing supervisory level over all banks element.
From the beginning, the Committee's target was to strengthen the administrative coverage role so that no financial institution would escape from such supervision. In addition, supervision would be satisfactory and steady for all parties. Thus, an initial phase in this heading was the paper issued in 1975 that came to be known as the 'Concordat". The Concordat set out standards for sharing supervisory obligation regarding banks. As a result and implying to these aims, the committee started to release its standards and regulations under Basel I, Basel II and what's now released under the name of Basel III.
2.2 Basel I:
Since risk and returns are main fundamentals of financial regulation and banking sector. In 1988, Basel Committee on Banking Supervision (BCBS) has presented first International regulation Basel I. Moreover, Basel I aims at supervising banking risk and stress with the aid of standardized Capital Adequacy Ratio (CRAR), and focusing on the credit risk and market risk, as the main business of banks is lending and borrowing, in addition to treasury & investment operations.
CRAR found to guarantee minimum capital to cover depositors' money from risky assets. Unfortunately, after failing in various frauds and weakness in Basel I regulations, and due to changes in technology, financial industry and many other factors, it was essential to start working to develop and strengthening the current standards through moving to new additional requirements that named Basel II
2.3 Basel II:
Since one of the faults in Basel I standards was that it didn't include and cover the operational risk, which is a major element that should be taken into consideration. In addition to other weaknesses such as uncovering the liquidity risk. Thus, basel committee started to move into more risk accurate standards, that introduced in June 26, 2004 under the concept of Basel II that included the operational risk as one of the main risks that should be hedged, in addition to the market and credit risks, which were already included in Basel I.
On the other hand, the Basel II concept shed the light on three Aspects; first, is lesser capital requirement, though taking into consideration three types of risks, which are: credit, operational and market risks. While other types of risks were not included in this stage. Second, external auditing and monitoring by central bank, to insure implementing and achieving bank's capital adequacy in addition to sufficient internal audit. Third, reaching the target of Market Discipline by effective disclosure to encourage safe and sound banking Practices (Roy et al, 2013).
2.4 Basel III:
Basel II characterized as 'the wrong kind of regulations' that led for the crisis, because it miserably failed to protect the portions of bank's investors, through inability to achieve its main peril such as, capital Adequacy. Also the regulators didn't take into consideration the liquidity and leverage ratios, which are considered the main important risks that could affect the banking sector.However; while Basel III is assumed to establish safer banking system, the committee worked on it as a far reaching set of change measures, to support the regulation, supervision and risks administration of the management of the banking section. These measures concerned to enhance the banking sector's ability to resist any expected financial shocks, as well as to enhance risk handling and governance, and empowering banks' transparency and disclosures (BIS, 2014).
Therefore, basel III guidelines were declared in December 2010.Wheras, the cash related crisis of 2008 was the basic role for the presentation of these standards which go for profiting activities and Provide a stronger framework to keep money by concentrating on four essential saving money parameters which are; capital, leverage, funding and, liquidity (Roy et al, 2013).In contrast, the committee focused to enhance the liquidity framework through developing two distinguished but complementary standards to supply liquidity. The first standard aims to guarantee resilience of banks to cover short term obligations and survive through stress periods that maintain for 30 calendar days, which is represented in the LCR. The other standard, which is NSFR that founded to complement the resilience of Liquidity by assuring to cover obligations that banks could incur within long term periods that has a horizon of one year.
In particular, the LCR will be presented partially starting from 1 January 2015, and will be completely implemented and applied in banks on 1 January 2019. This new methodology, will be combined with the adjustments that will retain until 2010, in order to guarantee that the LCR can be obtained without material interruption and with the systematic strengthening of saving money frameworks. Further, table (2.1) shows the minimum required liquidity coverage ratio for each year, starting from the year 2015 by keeping minimum required portions of High Quality Liquid Assets in order to achieve the mentioned ratios over years.
Table (2.1): Represent Minimum required liquid coverage ratio
Year 2015 2016 2017 2018 2019
Minimum LCR Requirement 60% 70% 80% 90% 100%
Source: Bank for International Settlements, 2013
Two conditions should be available in order to consider the assets sufficient to be a HQLA; the first one is the ability to convert these assets into cash with small amounts or without losses in order to defense against any cash flow gaps. The other one is the ability to convert these assets within short time period to avoid any delay in covering the financial obligations. As well as, these HQLAs will be used to achieve the required 100% percentage of LCR, which mean that these assets will be used to cover the expected cash outflows that are expected to be paid during the next 30 days. In other words, it's assumed that the LCR should be always 100% or higher, so in the case of stress these assets will be used. In such circumstances LCR will decrease and here come the role of the bank's supervision to be more flexible on maintaining this ratio within short period.
However; fixing the LCR require supervisory decisions regarding the required amounts of deductions from HQLA. These decisions should not only focus on achieving LCR objectives, but also to forecast how these restricted assets could affect the bank and market participants, taking into consideration the evaluation of macroeconomic, financial and macro financial conditions in that time . According to the BIS (2013) the analysis of bank's supervisors and their reactions against the decline in LCR should take into considerations the following points:
1. Supervisors should consider all circumstances in advance, and follow them with the appropriate reactions if required.
2. Managers ought to take into consideration separated reactions to a reported LCR under 100%. Any potential supervisory reaction ought to be proportionate with the drivers, size, and length of time and recurrence of the reported deficiency.
3. They ought to evaluate various firm and market particular elements in deciding the fitting reaction and different considerations identified with both local and worldwide structures and conditions.
4. Supervisors should have a set of tools that are available to serve the bank at any time to address a reported LCR under the required 100%.
5. Supervisor's reactions should be harmonized with the generic approach of hedging framework.
2.5 Literature review:
According to Kohli et al. (2013), banks could face many different types of risks and one of them is liquidity risk that result from dealing with lending and borrowing activities. As a result, it was obligatory to deal with these banks by dealing with with a set of regulations proposed by the Basel Committee. Therefore, BCBS has presented the first two International Standards basel I and II attempting to build up measures and rules to be faced with various types of risks. However, due to these unsuccessful attempts and inability to stay away from the liquidity risk, it was required to begin building up the new basel III.
2.5.1 Liquidity Risk and Basel III:
Basel III shed the light on new type of risks, which is liquidity risk by imposing measures for the future and discovering an arrangement of least necessities that ought to be kept up on assets base.
Accordingly, it introduced two new ratios LCR and NFSR to evaluate, monitor, and guide liquidity risk exposure, in order to be well-run and let the banking and financial sectors accomplish dependability, also maintain a strategic distance from instability that influence the economic situation, in addition to avoid a similar 2007/2008 emergency, and lead banks to spare altered rates from particular stable funds resources.
However, it has been noticed that liquidity is a concept that is mostly less to recognize than to really characterize, in light of the fact that it can be characterized differently in diverse situations (Clerc, 2008).For instance, liquidity characterized by exchanging assets or securities in a business sector without a critical impact on their value or declining the cost for a large number of assets offered for sale any time by investors. Therefore, we can say that these instruments traded in the market could affect liquidity, based on the degree of risk connected with having the ability to exchange monetary instruments without missing value (Brunnermeier and Pedersen, 2009).For example, the cost of homes when these securitized home loans offered for sale at a lower price in return during the financial crisis.
Consequently, a change happened in the economic situation and the liquidity risk which started to show up for banks that operated a lot of their capital in home loans (Acharya & Schaefer, 2006). Based on the above mentioned, lliquidity risk reflect the ability of banks to obtain funds through deposits and borrowing with satisfied price in specific time. But, on the other hand a worldwide standard for deciding satisfactory bank liquidity is seemed to be difficult to realize and keep up worldwide liquidity soundness. Therefore; Basel III prerequisites have been made to offset such risk in banks when having abnormal amounts and not appropriately overseeing liquidity risk.
2.5.2 The effects of applying LCR
The banking sector in many countries started to commit with applying new Basel III guidelines, since they follow basel's approach.Of course this will lead for different changes and particularly the liquidity risk measure LCR. It's expected to have impact on other kinds of risks that have relationship with it, as well as to affect some variables such as lending. Thus, Schumacher and Giordano (2011) analyzed these effects of the new liquidity regulation LCR, they focused on bank's lending procedure by using historical data of Luxembourg's banks that represents around 82-100% of total assets in the banking sector of this country over the period 2003-2010.
The results show that due to applying the LCR guidelines, banks will be obliged to increase the rate of interest on loans as they have a commitment with keeping fixed amounts of assets as a backup for stress periods. According to the LCR instructions application the lending procedures for these banks are going to be effected for all banks in general due to the amendments that will take place, especially the small banks which have a significant role in lending in comparison with the large banks. The study also focused on bank's size as a factor related to bank's ability to face financial stress periods. As result, it is found that small banks are unable to face financial shocks despite of their stable funding through their loans portfolio, while large banks are more liquidity providers in stress periods, even if they have a variance in the required funding amounts in comparison with the available stable funding, therefore large banks are more able to challenge such stress and being more financially stable.
On the other hand Angelkort and Stuwe (2011) published a study that focused on German Banks, its aim is to analyze the new liquidity regulations of Basel III from the point of view that these new rules will be applied on the financial sector which in turn have a significant effect on the national economy of Germany. They found that the new regulations could threaten the stability of small and medium enterprise which financed by deposits in their business model, because these banks will not provide the same financial support as they have to commit with Basel Conditions. But in general they saw that it's advisable for German Banks to have full implementation of Basel III, hence adjusting the regulations to the different plans of action and the applicable particular urban areas of national keeping money divisions accordingly fitting. For systemically critical banks effective over the European Union, by differentiation, full execution ought to be looked for with a specific end goal to avoid distortions of competition.
Whereas, schmitz (2011) used conceptual framework to analyze Euro banking system and found that LCR will lead banks to reduce bank's activities in lending and borrowing in the unsecured money market. He also found that when banks become unable to reach their planned targets from open market operations, they start to bid competitively regardless of the quality of collateral pool which in turn will increase the risk in Euro system. In addition; Schmitz see that LCR will lead to Increment in the fluctuations in interest rates on the secured and unsecured money market, which would appear significantly on the slope of the yield curve as increment within the short period. These fluctuations may consequently lead to further volatility within these periods of instability, and this in turn will affect the money market status in general and the monetary policy of banks .
Furthermore, another study agrees Schmitz's (2011) opinion regarding his negative results related to the effect of LCR on bank financial status. In this study for national banks in Czech for the interval from 2000 to 2010. Horv''th et al. (2012) mentioned that complying in this liquidity measure will lead banks to hold high capital ratio, in order to be in line with Basel III regulation and have sufficient ratios of liquidity. Whereas, Horv''th et al. argued the deterioration between achieving financial persistence result from powerful capital requirements and achieving higher liquidity, as a result they saw that Basel committee trying to realize two different contradict targets, and with time applying the required liquidity constraints will lead for decrement in liquidity.
Hartlage (2012) from another side supported Schmitz's negative feedback regarding the impact of applying LCR. He argued that it is mandatory to study the LCR over short periods, by analyzing the republic of Korean's banks to extract LCR effects on the financial stability. Unfortunately his results supposed that by the time of applying the LCR, banks will face systematic risk whereas preventing such risk is a main objective behind the LCR.
Hartlage also see that LCR formulated in a way that recognize between stable and unstable funding sources as wholesale and retail deposits, this will lead banks to behave in an irrational behavior, which in turn will cause disruption in the financial stability of banks, since these banks will try to follow new strategies to cover the LCR that includes increasing bank's borrowing to unacceptable levels in order to satisfy the LCR. However; Hartlage supported his results by shedding the light on old regulations were already applied in the republic of Korea that are very similar to LCR in formulation. Applying these regulations caused financial deformation in the market and eventually regulators decided to retire these regulations.
However; Kruidhof and End (2012) analyzed the LCR, but this time as macro prudential tool to evaluate the origins and systemic effects of stress. Unlike many studies that focused on LCR as internal monetary policy only. This study depended on simulations that built on hypothetical banking sector, it contained fifty institutions and randomly the assets and liabilities of each bank were chosen taking into consideration that LCR shouldn't be less than 100%.They also tried to know when banks are able to rely on their liquidity buffers and when the central banks should be as the lender of last resort (LOLR) to rely on. They focused on the systematic effects of LCR using stress-testing model by presenting three situations: a) reducing the LCR requirements, b) expanding the assets that could be included under LCR requirements by adding a less stable assist in the calculations, c) asking for funds from central Bank.
For reducing the LCR requirements, the test results approved the success of LCR as defensive measure through its ability to safeguard these banks from proposed stress situations, although there was some delay in the recovery process. In another situation at maximum stress periods and due to adding non-marketable assets in LCR requirements, it couldn't be so effective as protecting tool since assets status to be included in calculating LCR were changed during the test. In this case when LCR failed as macro prudential tool and the LOLR became mandatory, in such a case the central bank has to play this role by purchasing assets from banks in order to reach the financial recovery.
Moreover; the idea of using central banks as LOLR was the main point that Stein (2013) focused on .His paper mentioned that one of the reasons behind the existence of LCR is to regime the role that central banks play as LOLR especially during the financial crisis in 2007/2008, it also focused on liquidity regulations (LCR) in banks and the role of central banks. Basically the central banks were a witness of this mishap and who spent the time and effort in order to find a remedy during the mentioned crisis of 2007/2008 .this was a tremendous achievements not only for banks and financial issues, but also the humanity of this globe.it was a great task carried by great members of know how.
Stein see that LCR will achieve the financial stability if banks committed in applying it as represented by Basel, but on the other hand supervisors shouldn't look at this liquidity regulation separately. banks should recognize that it's the role of the banks to carry out the necessary measures in order not to fall in crisis and depend on central banks to cure the financial discrepancies, he also see LCR is part of a bigger toolkit that also include the capital requirements and the role it will play is a satisfying tool for the banking sector to prevent the central banks to act as LOLR for them.
2.5.3 The determinants of bank's liquidity (LCR)
Many studies have focused on examining the determinants of LCR as a measure of liquidity risk. One of these studied is Bonner et al, (2013) who analyzed the balance sheets for 7000 banks over the period between 1998 to 2007 for thirty countries that are members in the Organization for Economic Cooperation and Development (OECD). This study aims at finding the variables that have relation and could be implemented through the liquidity Regulation. They divided the variables into two groups. The first one focuses on bank-specific variables such as business model, profitability, deposit holdings and bank size, and the second group include country specific factors like the banking sector disclosure and concentration. They found that there's no effect for the disclosure variable, because LCR will set a certain target in order to secure banks in general against financial crisis. LCR can tackle the job by having quantitative holdings requirements on banks in order to achieve precise output as a final result, which can be relied on for secure state. In addition, they found non-linear relation between liquidity regulation and bank size; usually large banks have more liquidity than small banks. Other variables included in their study such as deposit holdings had strong effect on the liquidity.
Moreover, Cucinelli (2013) studied the relation between banks liquidity measured by LCR and its determinants using 1080 European banks over five years. He focused on a set of independent and control variables that could affect the liquidity in the banking Sector. These variables were divided into macroeconomic variables such as the inflation rate and a dummy variable to denote listed and non-listed banks, in addition to microeconomic variables as Bank Specialization, Capitalization, and Loan Loss Reserve Ratio. Their results show a significant relationship between those variables and LCR, except the dummy variable that denote for listed and non-listed banks; there was no significant relationship with liquidity. While banks specialization variable has a negative relationship with liquidity; as banks are more specialized in lending their liquidity will be lower.
Cucinelli's results also show that bank capitalization and size have appositive relationship with liquidity, therefore banks with higher capitalization and larger banks have more liquidity. while Loan loss reserve ratio, which is the second microeconomic variable, he mentioned that loans consider valued assets in banks that have double-edged sword; a negative and positive effect on the overall liquidity for the bank, because granting loans for insufficient borrowers who are unable to repay the amounts and accumulated interest rates is one of the main reasons behind the liquidity risk bank financial stress.
Standing for that Roman and Sargu(2013) used banks working in a series of CEE nations (Bulgaria, the Czech Republic, Hungary, Latvia, Lithuania, Poland, Romania),and examined the impact of bank specific variables such as the proportion of impaired loans and capital ratio on LCR over the period 2004-2011. Their investigation highlighted the negative impact of the deteriorated loans portfolio on the banks liquidity and a constructive outcome.
In addition to the obtained results, also their results show that there's obviously significant impact of internal variables on the general liquidity of the analyzed banks as the aggregate capital ratio, the proportion of impaired loans to aggregate loans and the returns on average equity. Therefore; supervision powers must locate a proper harmony between their liquidity prerequisites and the value that they put on the banks' shareholders. As these are obliged to contribute with extra supports to the bank capital, their value on the bank administration for an improvement of the bank returns will increment likewise exponentially, which can focus on the likelihood's of upgrade for high risk to show up.
In another evaluation to figure out the factors that could be determinants of liquidity regulation LCR, Vodov'' (2013) utilized data of the Hungarian commercial banks over the period 2001 to 2010. The paper introduced factors that may affect liquidity in direct or indirect way. For example he studied the banks size and interest rate as indirect factors affecting positively the rate of loans, which in turn will affect bank's liquidity negatively. Moreover, bank's capital adequacy and profitability are other two variables that have positive relation with liquidity. This imply that banks management can improve its incomes by attracting more clients through introducing and upgrading different methods to promote efficiency of management ,so as to encourage customers and shareholders. While other factors such as unemployment and financial crisis have no significant effect on bank's liquidity.
2.5.4 How banks prepare for LCR
What recognizes new Liquidity Basel III regulations that it will be applied partially, and banks need to start measuring LCR value before starting to commit with it officially, in order to avoid any financial problems for banks and financial sectors. It is a restricted procedure on valued assets that are the main quotation of sources of profit for these banks, therefore; it's recommended to start on this theory in order to apply these regulations in advance period before the process of official activation takes place in 2019.
One of the researches published by Hann and End (2012) examined the liquidity conduct in 62 Dutch banks over the period 2004-2010.They found that most of the banks hold more fluid assets against fluid liabilities, which is consistent with Basel III liquidity requirements. This refers to quantitative liquidity supervisory System, which looks like the Basel III requirements that is called Liquidity Balance (LB) presented and managed by Dutch account controllers.
So, with LB monetary policy we can see that the vast majority of these banks as of now satisfy Basel III's LCR principle. Thus, the proof recommends that the LCR would not prompt huge assets alterations by Dutch banks, since they have arranged to the Basel III which fulfills all necessities by meeting residential administrative guidelines (LB).
Another paper presented by Cannata el al. (2013) evaluated 13 samples of Italian banks in order to analyze their preparations to start applying LCR and current liquidity status. They found that banks are moving steadily in partial steps to reach the liquidity requirements as results showed improvement in their liquidity status in the last two years between 2010-2012, regardless of the hard economic circumstances which mean that Italian banks will not face difficulties in applying Basel III requirements since they prepared for them in advance.
Moreover; Kutum and Hussainey (2014) aimed to break down and evaluate the present LCR of Canadian banks' and to compare their practical preparations for the liquidity requirements over the period between 2009 to 2013.It found that LCR for six noteworthy Canadian banks were ascertained utilizing the fluid assets and liabilities recorded on their accounting reports during the given period, they were liable to have the capacity in order to meet LCR requirements.
While one bank is just scarcely meeting the 2015 necessities, bringing up the issue of whether it will have the capacity to meet and keep up Basel III liquidity prerequisites. However, the restriction of this study is that the LCR equation utilized as a part of Basel III couldn't be ascertained; as LCR quantitative requirements not published before 2015, therefore they calculated the LCR by the liquid assets and liabilities listed on the balance sheet.
2.5.5 How Basel III will affect Banks
Caruana (2010) studied the impact of Basel III on enhancing the financial situation of the banking sector in Latin American and Caribbean banks. He proposed that applying these new regulations will guide banks for stronger techniques to manage liquidity risk, through executing stricter administrative and supervisory guidelines, also it will keep the financial stability for these banks .In addition, since basel III took into consideration the inability of Basel II to face the crisis in 2007/2008, it's expected that it will protect the banking sector from further expected crisis in the future.
Moreover, Cosimano and Hakura (2011) utilized a group of 100 biggest banks worldwide over the period 2001-2009. Their study mentioned that due to the new regulations, banks should be able to measure the total riskiness and manage it because liquidity risk considered determinant of some other risks such as credit risk. Also, the supervisory systems of banks have to think how to increase their loans rates because of Basel III constraints in regard to dealing with risky assets and holding quantitative assets, which will lead to decline in the growth of Loans to avoid the loss of principal or loss of a financial interests, which will automatically lead to shortage in liquidity for that bank!
However; Angora and Roulet (2011) evaluated the utilizing of liquidity guidelines as characterized in Basel III accords to distinguish banks troubles through covering US and European publicly traded commercial banks over the period 2005-2009. They did experimental examination in the connection of the latest financial crisis stamped by imperative liquidity deficiencies and mentioned that banks have to work on improving the liquidity profile as recommended in Basel III, as committing with overall Liquidity guidelines will redeem these banks from stress situations, and thus, guarantee the stability and resilience for long and short term periods.
Furthermore, Slovik and Courn''de (2011) studied the impact of Basel III on GDP as a macroeconomic variable, through analyzing bank's data in the United States, Japan, and Euro area during the period 2004-2009.They found that Basel III will lead for changes on the structure of assets and liabilities for banks due to its quantitative constraints ,which in turn will incrementally affect the funding costs and consequently banks will be forced to work on spreading secured loans in order to avoid depreciated loans to cover Basel requirements and in general GDP development will be in the scope of '0.05 to '0.15 rate point per annum.
Another study for Locarno (2011) concerned with the Italian banks and economic examined the impact of the new liquidity regulations of banks on GDP. His paper gave an appraisal to the Italian economy and the expenses of Basel III changes, concentrating solely on capital and liquidity Prerequisites. Locarno found that Compliance with the new liquidity measures will lead for a decline in GDP. Since raising liquidity guidelines may have an expense and banks may react through bringing down unsafe resources of money in their financial reports, also this monetary policy will Influence families and firms lending and as a result GDP would drop.
This result is consistent with the result of Boshkoska (2013) who analyzed the banking sector as a controller on financial situation in the Republic of Macedonia in comparison with a few nations in the region. In addition, he found that applying the new requirements will decline the profit of small banks which in turn will affect the banking and economic sector. Also, he showed that it is important to bring down the quantity of banks existing in Macedonia through the procedures of combining, overwhelming of the small banks by the bigger ones, with a specific end goal that is improving the total profitability of the banking sector.
As Boshkoska mentioned, the presentation of the new requirements will impact the level of productivity of banks in Macedonia. Therefore, Bank's union will be a good solution to protect small banks and set of actions that could protect them Such, increasing the business sector share, Expansion of business exercises, Increasing the sort and nature of administration for their clients, Increasing challenges and gains, moderated costs, and Strengthen the bank capital.
However; another study for Jayadev's (2013) is consistent with Locarno (2011) and Boshkoska (2013) results regarding the effect of applying basel III on GDP. The study examined Indian Banks and found that with time basel may affect negatively on Gross Domestic product (GDP),due to higher government borrowing and money shortfall because these banks have to commit with higher quantum of liquid funds under certain conditions of quality and quantity. The decline in GDP might likewise influence ventures, credit off-take and banks' profits.
In addition; Mardini (2013) studied a sample consist of 13 companies and 13 Banks listed in ASE from 2006 to 2012 in Jordan, his aim was to know what could be the impact of applying Basel regulations, and how liquidity regulations could affect the systematic risk .
Mardini analyzed the relation between the systematic risk and liquidity under applying Basel III regulations, while he measured Bank's liquidity by cash to total assets. The analysis results denoted to negative relation between systematic risk and liquidity, while Basel III aims to keep the LCR =100% and this result is sufficient to avoid liquidity risk ,which in turn will lead to reduce the systematic risk.