Liquidity Crunch Research Articles

Reserves Were Not so Ample After All

Abstract We show that the likelihood of a liquidity crunch in wholesale US dollar funding markets depends on levels of reserve balances at the financial institutions that are the most active intermediaries of these markets. Heightened risk of an imminent liquidity crunch is signaled by significant delays in intra-day payments to these large financial institutions over the prior two weeks. Our study contributes to the broader dialogue surrounding the Federal Reserve’s ongoing quantitative tightening (QT).

Liquidity Crunches in the Banking Industry of Nepal

Liquidity crunches in the Nepalese banking sector have been a critical issue for the last few years. This research aims to examine the causes, consequences, and improvement of liquidity crunches in the context of the Nepalese banking industry. This study is based on primary sources with explanatory and descriptive research design. The study population is all the bankers and experts involved in the banking sector - commercial banks, development banks, and regulatory authorities of Pokhara Metropolitan City, Kaski, Nepal. The five-point Likert scale questionnaires were developed to collect the data from the 213 banking professionals based on the non-probability sampling method. This study found a significant impact of government capital expenditure, bank lending policy, and monetary policy on liquidity crunches in the banking industry. The liquidity crunch hampers the growth of business and industry, and discourages entrepreneurs because they are not getting loanable funds as and when required. It creates instability in the financial system, deteriorates the investment environment, generates high inflation and unemployment rates , and affects economic growth rate in the country. The government should increase capital expenditure capacity. Bank lending policy should be directed towards a productive investment. Appropriate monetary policy should be designed to address the liquidity crunch problem in the banking sector. For this, the government and regulatory authority may promote an inclusive and sound financial system in the nation.

Conundrums of the Liquidity Determinants of Commercial Banks in Ethiopia

This study examines the conundrums of the liquidity determinants of commercial banks in Ethiopia. The study employed a causal research design by utilizing data from 2011 to 2021. The study unit of analysis is 15 commercial banks in Ethiopia. It utilized General Methods of Moment (GMM) dynamic panel regression. The finding showed that bank profit, interest rate margin, concentration ratio, and inflation have significantly adverse effects on bank liquidity. However, capital adequacy has no significant effect on the bank's liquidity. Besides, the growth of the gross domestic product and exchange rate significantly enhance the bank's liquidity. The study urges bank management and regulatory bodies to search for the optimum trade-off point between profit and interest rate spread at the required level of liquidity. Besides, policymakers and regulators should take measures that neutralize the detrimental effect of the market structure of the banking industry. Since inflation and money supply (M2) negatively affect liquidity, it is vital to transform macroeconomic variables into a robust institutional mechanism to enhance liquidity. Generally, the study recommends continued supervision and support to shield banks from a liquidity crunch.

Pricing the net benefits of a public loan guarantee scheme in a developing market

Turkish credit markets experienced a liquidity crunch following the Brexit referendum in June, the attempted coup in July, and the US election in November of 2016. The government announced a 12.5-fold increase in the Treasury support for the Credit Guarantee Fund to alleviate the credit squeeze. We investigate whether investor reactions to the announcement of the increase in Treasury support in KGF are in line with the stated aim of policymakers. Firms listed on Borsa İstanbul averaged 5.72 percent cumulative abnormal returns (CARs) in the 9-day window around the announcement. Investors anticipated the benefits from public guarantees would outweigh the costs. The positive and significant CARs suggest that the information released in the announcement, in line with the program aims, positively affected investor expectations.

On the Meanings of Crisis

On the Meanings of Crisis

The application of financing and dividend decision techniques in practice among Ghanaian chief financial officers (CFOs)

We use a survey approach to investigate how managers in a frontier market apply financing and dividend decision techniques in practice. 15 firm characteristics were grouped into paired subgroups for a two-sample t-test analysis that generated statistical differences, economic significance levels and ranking for each technique investigated. The Ghanaian listed firm’s sample choice was due to the country’s persistent volatile macroeconomic environment. In managing the capital structure, managers consider most relevant issuing of stock to give investors a better impression of their firms’ prospects (signalling). In choosing between short and long-term debt techniques, the most applied technique is matching the firm’s debt maturity with the assets’ useful life span. Managers are most concerned about the volatility of their earnings and cash flows on the appropriate amount of debt to use. A probe into debt policy indicates that the most valuable technique is issuing debt when the firm’s internal funds are inadequate. Under dividend policy, the most treasured technique is ensuring cash availability which deviated from existing literature. These results show that managers in frontier markets are cash-focused, which may lead to short-termism, which may be non-value-adding but important for survival in their persistent liquidity crunch markets.

Reviewing the Impact of Liquidity on Real Estate: An International Comparative Study

After battling significant losses due to the global financial crisis of 2008 and the COVID-19 pandemic, the UAE real estate market has seen new highs in 2021 and 2022. The uptrend of this sector is likely to continue into the next few years, with the money of foreign investors pouring in and the persistent increase in oil prices. Innovative policies and initiatives have made the UAE a haven for investors while Europe and some other countries deal with a liquidity crunch. As per our observations, property purchase in the UAE seems to be a very sound long-term investment, which is probably one of the safest in the uncertain world we are living in today. This paper aims to study how liquidity affects the performance of the real estate market in the UAE and other countries. The findings reveal that the UAE is an ideal real estate investment destination in times when many countries are facing tightening financial conditions, with some on the brink of deep economic crisis. UAE Government policies like the Golden Visa Scheme and zero property taxation welcome more expats to invest in UAE properties and settle in the country. Foreigners are attracted by the country’s sound capital markets, excellent infrastructure, economic stability, and perceived absence of systemic corruption. The credit fundamentals of UAE banks are strong for the coming years, with high oil prices supporting liquidity. The findings also suggest that Dubai real estate will continue to thrive despite the fear of global recession. However, investors should be prepared for a possible increase in property prices and annual rents in the coming years as the UAE real estate market continues its upward trajectory in line with the rising oil prices and foreign direct investments.

Volatility spillover networks of credit risk: Evidence from ASW and CDS spreads in Turkey and Brazil

This study examines received and transmitted volatility spillovers of Credit Default Swap (CDS) and Asset-Swap Spread (ASW) for Brazil and Turkey. The empirical analysis is implemented using two country-based (stock markets and exchange rates) and two global (volatility index and global economic activity index) variables to account for the impact of integration into global markets. Empirical results suggest that both countries display distinctive features in their spillover networks. While exchange rates and the stock market figure prominently in Brazil as a source of spillovers, for Turkey, the primary element in spillovers appears to be credit risk indicators. Time-varying analysis results show that the European Debt Crisis of 2010-2011 and the global liquidity crunch of 2018-2019 are two critical periods in volatility spillovers that occurred toward credit risk indicators. Brazil displays more sensitivity to the developments of the pandemic than Turkey, likely due to its dependence on global economic activity and energy prices. Finally, for both countries, the leading variable in spillovers to credit risk indicators during financial turbulence episodes appears to be foreign exchange markets. This result highlights both economies' fragility and vulnerability to foreign exchange market-based shocks. Thus, we suggest effective and solid measures in this regard. Otherwise, those shocks could potentially induce a higher cost of financing in both economies due to the negative impacts on CDS and ASW spreads.

Influence of business profit, corporate governance and risk profile on the profitability of bri sharia bank

With the increase in Covid-19 cases since March 2020, the Indonesian government has taken several actions to break the chain of the corona virus by implementing PSBB (Large-Scale Social Restrictions), namely by closing schools, limiting employees who work, closing places that are otherwise not so. This condition makes many people lose their jobs and has an impact on people’s finances. This policy raises concerns in the banking industry because it will experience a liquidity crunch and cause a crisis in the banking sector. BRI Syariah Bank experienced fluctuations in the development of profits and assets as in March 2020 there was a decrease from profit which was originally 603.15 billion to 214.01 billion and increased again in the second quarter or in June 2020, which was 266.64 billion. The purpose of the study was to determine the effect of operating profit, corporate governance and risk profile on the profitability of BRI Syariah Bank in 2018-2021.This type of research uses library research. The data is obtained from the documentation website www.brisyariah.co.id. with a quantitative approach and the phenomenon of the Covid-19 pandemic. The data used in this study is the financial performance of the BRI Syariah bank for the 2018-2021 period. The analytical technique used is multiple linear regression analysis, then processed with the help of an SPSS analytical tool.The development of Return on Assets (ROA) with an average of 1.7463, the average development of Good Corporate Governance is 1.7539, the NPF position is above with an average NPF value of 1.5974 percent, the LDR position is above the average value the average is 87.4606, and the average ROE is 5.2881. This value still has a good ability to manage earning assets to generate net interest income, which indicates that the increase in interest income is greater than the increase in interest expense so that profits will increase. The results of this study are (1) Return on Assets has a significant effect on the profitability of BRI Syariah Bank. (2) Good Corporate Governance has no effect on the profitability of BRI Syariah Bank. (3) Non- Performing Financing has a significant effect on the profitability of BRI Syariah Bank. (4) Financing to Deposit Ratio does not affect the profitability of BRI Syariah Bank.

The Interplay between Potential Capital Market Development and Bank Performance in an Emerging Economy Context: Do they Compete or Co-evolve?

Recent theoretical arguments regarding financial institutions and capital market relationships signpost a paradigm shift from a superiority to interdependence. This study investigated the interplay between potential capital market development and bank performance in an emerging market context. To achieve its objective, the study used primary data collected through interviews with subject matter experts, consultants and seasoned leaders. The AHP and DEMATEL multi-criteria models were employed to establish a level of importance and interdependence relationships. AHP results in descending order indicate liquidity, capital adequacy, asset quality, profitability and efficiency as key performance indicators of banks in Ethiopia. The bank-market interdependence analysis projects market capitalisation, efficiency and asset quality as causes for the group and liquidity, trade volume and profitability as effects for the group. The study predicted competitive interdependence in future bank-market interplay in Ethiopia. Following the competition from the capital market, Ethiopian banks will have lower liquidity, improved service, and a higher interest rate structure. To mitigate a potential liquidity crunch, the study proposed lowering asset maturity periods and raising capital adequacy as plausible central bank policy measures.

Cross-border interbank liquidity, crises, and monetary policy

We analyze how the Lehman and sovereign crises affect cross-border interbank liquidity, exploiting euro-area proprietary interbank data, crisis and monetary shocks, and loan terms to the same borrower during the same day by domestic versus foreign lenders. Crisis shocks reduce the supply of cross-border liquidity, with stronger volume than pricing effects. On the extensive margin, results suggest that the cross-border credit crunch is independent of borrower quality, while—on the intensive margin—riskier borrower banks suffer more. Moreover, the cross-border liquidity crunch is substantially stronger for term loans, and weaker for foreign lender banks that have a subsidiary in the same country than the borrower. Finally, nonstandard monetary policy improves interbank liquidity, but without fostering strong re-integration of cross-border interbank markets.

Managing resilience of micro, small and medium enterprises (MSMEs) during COVID-19: analysis of barriers

PurposeMicro, small and medium enterprises (MSMEs) are facing major difficulties with working capital, need of digitalisation and lack of skilled workforce during this crisis situation. Managing resilience post pandemic is again a huge challenge for MSMEs. Therefore, the main objective of the study is to identify the critical barriers for recovery of MSMEs from the pandemic outbreak and recommending potential solutions for avoiding vulnerabilities.Design/methodology/approachThe most significant barriers, which will impact MSMEs resilience issues are extracted from vast literature review, discussed with nine experts from MSMEs and further categorised into organisational, operational and technical barriers. Best–worst method (BWM) has been used to find the importance rating of barriers for developing resilience in MSMEs.FindingsIt can be observed that the organisational barriers (0.507) are the most significant, followed by operational barriers (0.300) and then, technological barriers (0.192). Liquidity crunch and inadequate technical skills of employees are the most significant barriers for MSMEs resilience during COVID-19, whereas fluctuation in input cost, unavailability of containers on time and decreased process efficiency are the least significant barriers for recovering MSMEs post COVID-19.Practical implicationsFindings imply that MSMEs should try to overcome major barriers such as resource constraints, lack of skills and knowledge and inefficient inventory planning.Originality/valueFindings of study will be of immense use for MSMEs in efficient management of operations and in developing resilience during uncertain business environment.

Performance of NBFCS

NBFCs in India have seen diverse trends where on one hand they have given a stiff competition to established banks in the country and on the other hand have seen an emerging trend and strong complement to the banking industry. However even pre Covid19 the liquidity crunch forced the NBFCs to venture into alternative sources of revenue as the core businesses of loans and advances credit facilities were shrinking. The pandemic has been extremely challenging for the economy and this sector has been no exception. The current paper studies the impact of the pandemic on the NBFC sector of India. It studies the performance of the NBFCs using CAGR, Profitability ratios etc. in the pre and post Covid era and the business models that are being applied in order to cope up with the current situation.

A liquidity crunch in an endogenous growth model with human capital

AbstractThere is by now reasonable evidence that supports the notion of a trend break in the U.S. GDP since the Great Recession. To explain this phenomenon, I construct a version of the Lucas endogenous growth model, amplified with financial frictions and financial disruptions in the firms' sector. I then show how a transitory liquidity crunch is capable, at least qualitatively, of producing a similar pattern of a persistent downward shift in the GDP trend as one could infer happened in the United States since 2008. The main mechanism by which such a result is found relies on workers' decisions on providing labor to firms versus accumulating human capital. I show that a transitory liquidity crunch reduces the demand of labor. Workers anticipating a phase of depressed wages make the decision of accumulating more human capital in the short run, thereby reducing labor supply to firms. In the long run, however, incentivized by a strong recovery, workers decrease human capital accumulation and increase labor supply. Under plausible parameterizations of the model, this situation produces a net effect of a decrease in overall productivity that permanently reduces the trend at which the economy was growing prior to the crisis.

The perfect storm of personal consumption

The COVID-19 pandemic forced the governments of almost all countries to introduce lockdowns in 2020, which sharply reduced the supply in a number of large service sectors: transport, recreation, catering, tourism. The recession began without a crisis, and the unique supply of cheap money and fiscal incentives prevented the development of a “liquidity crunch”. On the contrary, it led to an increase in stock prices, real estate prices, and a reduction in bankruptcies. There was no drop in the value of pension and investment funds. The working population has faced a reduction in employment in labor-intensive service industries, a violation of traditional lifestyle models. The course of the recession in these conditions has changed the structure of personal consumption in developed countries, with its severe adaptation in medium-developed and less developed countries. The pandemic and the recession have caused an uneven compression of activity and consumption across social strata that leads to an increase in social disparities on exiting the recession. The drivers of the demand-side recovery in developed countries are the growth of investments in housing and durable goods, and developing countries are gradually restoring normal consumption of non-durable goods and exports.

Does lending relationship help or alleviate the transmission of liquidity shocks? Evidence from a liquidity crunch in China

We examine China’s June 2013 liquidity crunch as a negative shock to banks and analyze the wealth effects on exchange-listed firms. Our findings suggest that liquidity shocks to financial institutions negatively impact borrower performance, particularly borrowers reporting outstanding loans at the end of 2012. Stock valuations of firms with long-term bank relationships, however, outperform the market and experience smaller subsequent declines in investment than peers lacking solid banking relationships. This effect is the strongest for firms that enjoy good relations with China’s large state-owned banks or foreign banks, and weakest for firms whose connections are solely with local banks. We document a positive correlation between the stock performances of firms and the stock performances of lender banks and the likelihood of lender banks operating as net lenders in the interbank market. These results suggest that banks transmit liquidity shocks to their borrowing firms and that a long-term bank-firm relationship may mitigate the negative effects of a liquidity shock.

Socioeconomic Impact of COVID-19 in MENA region and the Role of Islamic Finance

This paper analyses the socio-economic impact of the noble Corona virus (COVID-19) on ‘Middle East and North Africa’ (MENA) region as well as the role and opportunities of Islamic finance post COVID-19. The findings show that pandemic has affected the MENA region massively like any other region in the world. Since around 69% of the word’s crude oil supply is from this region alone, this causes it to suffer from dual shocks of COVID-19 pandemic as well as the declining crude prices that is caused by shocks from both ends, negative supply shock and a negative demand shock. The 19 countries in MENA region include from some of the richest countries of the world such as, Qatar, Kuwait, and Saudi Arabia, to some of the most vulnerable, poor and war ridden countries like Yemen, Syria, and Morocco. To mitigate the adverse effects of the pandemic, we suggest some immediate actions that can be taken such as a public fund to support health system, financial support to individuals and SME’s, financial support to corporations in order to prevent job loss and layoff and assurance of liquidity in domestic markets to prevent liquidity crunch. Finally, the paper analyses the role of Islamic finance in the region in recovery post COVID-19 and show that Islamic finance can be utilized as an alternative financial system in providing the relief to the COVID-19 affected people and entrepren

The Global Financial Crisis 2007-2009: A Survey

The goal of this survey is to summarize the 2007–2009 Global Financial Crisis (GFC) main reasons and consequences. The GFC originated in developed countries and it was the first major financial crisis of the twenty-first century. From the United States perspective, the following four major events determined the GFC course: (1) the increase in subprime delinquency rates in the spring of 2007, (2) the liquidity crunch in late 2007, (3) the liquidation of Bear Stearns in March 2008, and (4) the bankruptcy of Lehman Brothers in September 2008. The GFC began in the U.S. but not all financial markets were affected by the crisis at the same time and to the same extent. The GFC periods were different in various countries. Therefore, the additional aim of this study is to gather the research results regarding the GFC periods within the world. Moreover, the research topics concerning stock market cross-correlations, contagion, integration, and globalization effects are often attributed to the impact of the GFC. Unfortunately, financial crises tend to repeat. For instance, the European markets have suffered from the subsequent financial crises since late 2009. Recently, financial markets in the world have been deeply affected by the COVID-19 pandemic crisis period.

Determinants of Bank Liquidity in Nepal

This paper examines determinants of bank liquidity of the commercial bank in Nepal based on 12 years long time series data base from 2004 to 2015, employing the econometric model. As a result, the bank liquidity of the commercial bank has fluctuation and instable trend line indicating the risk of liquidity crunch. Similarly, deposit, capital adequacy, remittance and bank size are determinants of bank liquidity of the commercial bank out of which deposit is prevalent to increase bank liquidity and capital adequacy is key to decrease it. In long term, capital adequacy, bank size and government expenditure increase bank liquidity of the commercial bank but deposit decreases it. Thus, internal variables influence bank liquidity more than macroeconomic variables. Therefore, the commercial banks should maintain bank liquidity in short period and in long period for achievement of financial health, stability and growth as per mention regulatory provisions and criteria of the monetary policy and the monetary policy should be formulated to maintain short and long term bank liquidity in accordance with IMF standards and guidelines for reducing the potential risk of liquidity crunch as result of the variation of macro-economic variables and of international global trade and oil price and production.

Closure and restart as an option for a sustainable South African national airline

Background: The non-implementation of certain key initiatives of South African Airways’ (SAA’s) turnaround strategy poses a risk that SAA may not recover financially. Objectives: The establishment of SWISS (previously known as Crossair and Swiss International Air Lines) as a successor airline to Swissair’s liquidation was studied to determine the viability of closure and restart of a smaller successor state-owned airline as an alternative option to a sudden liquidation of SAA. Method: The study is based on a literature review of analysis, official reports and financial results. Results: Three distinct phases for the establishment of the successor airline for Swissair were identified: (1) Financial distress of the SAirGroup (Swissair’s holding company) and the factors which contributed to Swissair’s demise. (2) The transition from Swissair to SWISS. Swissair’s grounding was caused by a liquidity crunch followed the announcement of bankruptcy protection. Flight operations were restarted a few days later with financial support from both the State and the private sector. Some of Swissair’s assets, routes, staff and flight operations were transferred to a subsidiary, Crossair, as successor airline, later re-branded as SWISS. SWISS, however, continued to incur losses despite progressively reduced scale of activities and four restructuring plans. (3) As a Swiss-based national airline SWISS, which became profitable following its acquisition by Lufthansa. Conclusion: The transformation of SWISS as successor airline to Swissair is an option to mitigate the risk of a sudden service disruption of SAA. Serious pitfalls require detailed preparation and funding before implementation. SWISS only became successful following its acquisition by Lufthansa.