CAPITAL ADEQUACY (SOLVENCY) AND LIQUIDITY RISK MANAGEMENT: ANALYSIS, EVALUATION, AND POSSIBILITIES FOR IMPROVEMENT

Aleksandra Žuk-Butkuvienė,Julija Staroselskaja,Dalia Vaitulevičienė

doi:10.15388/ekon.2014.2.3546

Abstract

Abstract. The main purpose of the present research is to analyse the supervision, capital adequacy (solvency) and liquidity prudential norms, limits and requirements of commercial banks operating in Lithuania, as well as to assess the quality of capital adequacy and liquidity risk management impact on the banking industry.The paper consists of two main parts: the analysis of literature and legislation, and the research, its results, recommendations, and conclusions. The first part reviews the theoretical analysis of the level of banking supervision and capital adequacy, liquidity prudential standards value. The authors have examined the banks’ supervising authorities and the regulation of their activities. There were are presented prudential standards of capital adequacy and liquidity for banks operating in Lithuania, their values’change after the Basel III reforms, and the scientific opinion about their development and tightening standards.The authors have carried out a study of the analysis of capital adequacy and liquidity prudential requirements, their evaluation and possibilities for improvement in banks operating in Lithuania. The analysis consists of the assessment of assets and liabilities of banks ensuring the prudential standards depending on the type of risk. The research revealed that the most important in banks’ capital adequacy and liquidity risk management is quality control and the harmonization of bank assets and liabilities. Besides, it is offered to review the calculation of requirements and procedures, to impose additional limits to ensure the basic standards and an efficient banking security.Key words: commercial banks, supervision, liquidity and capital adequacy (solvency) rates, qualitative and quantitative analysis, evaluation

Highlights

The recent international financial crisis revealed the major problems in the financial sector, its management and operations, and disclosed the gaps of inadequate supervisory regulation and a need for systemic regulation in the banking system
In 2011, the Basel Committee on Banking Supervision (BCBS) and the European Commission approved a set of reform measures, Basel III, based on the
Lithuanian banks comply with the prudential requirements with a considerable reserve; strengthening the standards may facilitate ensuring a low risk level or a high banking sector liquidity or solvency level, but may adversely affect customers and financial markets as well as the national economy by causing a decline in investment volumes, restricting operations development, possibilities for introducing new products, moving to new markets or meeting public needs

Summary

Introduction

The recent international financial crisis revealed the major problems in the financial sector, its management and operations, and disclosed the gaps of inadequate supervisory regulation and a need for systemic regulation in the banking system. The reform seeks to enhance capital adequacy and liquidity risk management by introducing more stringent risk assessment procedures at credit institutions and establishing more stringent prudential standards for banks with a view to strengthening their capital. For the purpose of implementing the Basel III and supervisory system reforms, the Bank of Lithuania will be obliged to enhance its supervision of banks and establish new standards approximated to those recommended or required by the EU. Lithuanian banks comply with the prudential requirements with a considerable reserve; strengthening the standards may facilitate ensuring a low risk level or a high banking sector liquidity or solvency level, but may adversely affect customers and financial markets as well as the national economy by causing a decline in investment volumes, restricting operations development, possibilities for introducing new products, moving to new markets or meeting public needs. For evaluating and analysing the capital adequacy and liquidity prudential requirements, the authors used the qualitative and quantitative data analysis and systematising, grouping, evaluation and comparison methods

Literature review

Findings

Conclusions