Liquidity Management Policies Research Articles

Effect of Liquidity Management On the Financial Performance of Nigerian Oil and Gas Firms

The Nigerian Oil and Gas industry, as a result of the COVID-19 pandemic, continues to be plagued with numerous economic challenges that affect its liquidity position and hinders it from delivering on its core mandate of profitability. Hence, the purpose of this research was to look into the effect of liquidity management on the financial performance of Nigerian oil and gas firms. Current Ratio (CUR), Quick Ratio (QUR), Cash Ratio (CAR), and Return on Capital Employed (ROCE) were explored as proxy variables for liquidity management and financial performance, respectively, using an ex-post facto research approach. The study used a purposive sampling approach to collect secondary data, which was based on the availability of data at the time of the investigation. These figures were collected from five Nigerian oil and gas firms' annual financial reports, which spanned the years 2012 through 2021. The data was analyzed using descriptive statistics and regression analysis. Results from the analysis revealed that Quick Ratio and Cash Ratio has a positive insignificant impact on Return on Capital Employed while Current Ratio has a negative significant impact on Return on Capital Employed. Based on the findings, managers of oil and gas firms should adopt effective liquidity management policies that guarantee an optimal level of liquidity that improves its profitability and enables them operate with a reasonable margin of safety.

Studi Literatur: Pengaruh Asset And Liabilities Management Terhadap Perbankan

This study describes Asset Liability Management of the Company through surveyed journals in Indonesia from 2017 to 2022. The purpose of this study is to add and develop research or articles on Asset and Liability Management (ALMA) published in Indonesian journals. The samples obtained were 25 articles. This research uses a systematic literature study method, with a PoP (Publish or Perish) application. From this literature study, we conclude that the operation of the Asset and Liability Management (ALMA) function can optimize the structure of a bank's balance sheet in a competitive financial market environment through bank liquidity management policies while maintaining quota and liquidity status. These include primary and secondary reserves, gap management by managing and controlling the gap between assets and liabilities to maximize net profit margin (NIM), exchange rate management by maximizing exchange rate differential returns, investment management and returns through investment decisions in a bank's fortopolio.

Cost of foreign reserve accumulation in emerging market and developing economies

PurposeThis paper aims to obtain a recent estimate of the cost of precautionary foreign reserve accumulation that emerging market and developing economies (EMDEs) had to endure to protect themselves against the risks of financial globalization. In addition, the study estimates the cost of excess reserves in emerging market economies (EMEs) using various reserve adequacy indicators that reflect potential sources of foreign exchange drains and vulnerability in EMEs' balance of payments.Design/methodology/approachThis paper begins by explaining the accumulation of foreign reserves in EMDEs as a self-protection strategy against the risks of financial globalization. Next, it sheds light on the different types of economic costs of foreign reserve accumulation. Finally, it estimates the cost of foreign reserve accumulation in EMEs during the period (1990–2018) and in EMDEs during the period (1990–2015) due to data availability.FindingsResults indicate that the cost of accumulating foreign reserves as a self-protection strategy in EMDEs and EMEs' was huge compared to their development financing needs. Applying various reserve adequacy measures demonstrates that many of the EMEs were holding inadequate precautionary reserves in 2018. Actually, this reflects the significant increase in external short term debt that many of the EMEs have witnessed since the eruption of the global financial crisis (2008). Thus increasing reserves in EMEs with weak reserve buffers and higher external debt is critical as they are more vulnerable to external shocks and capital flow reversals. Also given the estimated huge costs of accumulating foreign reserves, EMDEs should accompany it by other complementary self-protection policies and liquidity management policies to free up resources for productive investment.Originality/valueThe study contributes to the literature by estimating the cost of precautionary foreign reserve accumulation imposed on EMDEs during an extended period of time that covers a decade after the onset of the global financial crisis. Also to the authors' knowledge, this is the first study that estimates the cost of excess reserves in EMEs using various reserve adequacy indicators including the International Monetary Fund (IMF) assessing reserve adequacy (ARA) approach.

Effects of Fair Value Reporting of Derivatives on Liquidity Management Policies and Firm Value: Evidence From SFAS No. 133

I examine the effects of fair value reporting of derivatives, in accordance with SFAS No. 133, on corporate risk management policies and firm value. Prior studies predict that effective risk management through derivatives use reduces demand for liquidity and increases debt capacity. Using difference-in-differences analyses, I find that firms that are affected by SFAS No. 133 reduced cash holdings. In addition, treatment firms increased leverage but did not experience increased cost of debt or lower credit ratings. These results are consistent with the proposition that SFAS No. 133 encouraged firms to engage in more prudent risk management using derivatives. Finally, the value of firms that are affected by SFAS No. 133 increased. The results overall suggest that fair value reporting of derivatives had significant effects on corporate risk management policies and firm value.

Effect of Treasury Single Account on Liquidity of Banks in Nigeria

This study, effect of treasury single account (TSA) on liquidity of banks in Nigeria, was conducted in Nigeria. The adoption of TSA in Nigeria raised concern about its effect on bank’s liquidity because, before 2015, deposits of the ministries, departments and agencies (MDAs) of government contributed a significant proportion of banks’ liquidity. The specific objectives of this study were to evaluate the effect of TSA on the cash ratio, absolute liquidity ratio, liquidity coverage ratio and net working capital ratio of banks in Nigeria. The study adopted an ex-post facto design. Data were generated from the audited financial reports of the selected domestic systemically important banks (D-SIBs) in Nigeria from 2008-2014 (pre-TSA period) and 2015–2022 (post-TSA) period. Paired sample t-test was employed to analyze the data using Stata 14.2. The study found that TSA has a significant negative effect on absolute liquidity ratio; a non-significant negative effect on cash ratio and net working capital ratio; and statistically non-significant positive effect on the liquidity coverage ratio. These findings imply that Nigerian banks have not yet adjusted their liquidity management policies and strategies to cushion the negative economic externality effects of TSA adoption by the government on the banks. Therefore the study recommends efficiency in liquidity management, particularly investment of short-term assets and transferable assets to cushion the adverse effect of future liquidity distress.

An Analysis of the Financial Liquidity Management Strategy in Construction Companies Operating in the Podkarpackie Province

The activity of each construction company in conditions of high competitiveness is exposed to a number of risks that make it difficult to maintain high financial liquidity. In order to provide the continuity of ongoing economic processes and to be able to develop, entities are forced to build optimal financial management strategies for them. Enterprises can choose between a conservative, moderate and aggressive strategy, which is largely determined by the way they manage their current assets and short-term liabilities. In the case of construction companies, it is also not without significance that they are particularly sensitive to fluctuations in the economic situation and changes in the macroeconomic environment, which imply the availability of funds. The purpose of this paper is to analyze the financial liquidity management strategy of construction sector Polish enterprises from the Podkarpackie Province in 2017–2019 and the impact of this strategy on the profitability of the surveyed entities. In order to achieve the goal, the issues related to the classification of financial liquidity and individual liquidity management strategies are discussed. The issues and the goal set determined the choice of research methods. Literature studies, the Mann–Whitney U test, cluster analysis and Ward’s method were used. The research was carried out on a group of the 10 largest construction companies from the Podkarpackie Province. The selection of entities for the research was deliberately based on enterprises that submit their financial statements to the National Court Register. The conducted research showed that small and large enterprises applied different liquidity management policies even though they operate in the same industry and region. The small entities preferred a conservative strategy, while large entities preferred a moderate strategy. The existence of an inverse relationship between the phenomenon of financial liquidity and profitability of economic entities was also confirmed.

Liquidity Management and Bank Profitability: A Study of Selected Commercial Banks with National and International Authorizations in Nigeria

With profitability objectives conflicting with liquidity objectives of banks, there is need to reconcile these conflicting positions through effective liquidity management so as to ensure the survival and growth of banks and to prepare them against probable financial challenges. This paper examines the link or nexus between liquidity management and bank profitability in Nigeria. An ex-post facto research design was employed as relevant data were collected from the annual report of affected banks and the CBN statistical bulletin for the period 2006 to 2019. A total of 6 variables, split into 3 dependent and 3 independent variables were used in the study. The profitability ratios constitute the dependent variables. They are Return on Equity (ROE), Return on Assets (ROA) and Profit after Tax (PAT) while the Liquidity management ratios that make up the independent variables include Cash Ratio (CAR), Loan to deposit ratio (LTDR) and Loan to Assets ratio (LTAR). A panel data analysis involving the use of Generalized Least Square (GLS) method on a time series data with 14 observations and 10 cross sections were used to ascertain relationships. Outcome of the study indicates that, the coefficient of liquidity management ratios had a mixed bag relationship with profitability ratios of selected commercial banks - While some had a positive impact, others were negative. However, in return to equity (ROE) equation, it maintained a strictly negative relationship with loan to asset ratios (LTAR) of all the selected commercial banks except for Sterling bank. It was also a mixed bag scenario with other profitability ratios and the panel cross section fixed effects. Conclusively, it could be said that the actual sway of each policy is a function of other endogenous variables inherent in each bank. For example, how come it was only Stirling Bank that sustained a positive interface between return to equity and loan to asset ratio as a liquidity management tool? The answer to this question is not farfetched as every level of liquidity has a different effect on the level of profitability. It is thus recommended that Banks should evaluate and redesign their liquidity management strategies so that it will not only optimize returns to shareholders equity but also optimize the use of the assets. In this regard, the current liquidity management policies as put forward by the central bank of Nigeria should be sustained as they are helping to mop up excess liquidity. In a situation where a bank is experiencing excess liquidity crises, the following lines of action should be considered - such excesses should be invested in profitable financial outlets and in the real sectors at home or abroad. Again, such excesses could be used for expansion, where there is a positive synergy for such an expansion but where these are not feasible then, the bank should lodge in such excesses with the Central Bank of Nigeria. Keywords: Profitability ratio, Liquidity ratio, Return on Equity, Return on Assets, Profit after Tax, Cash Ratio, Loan to deposit ratio, Loan to Assets ratio. DOI: 10.7176/RJFA/12-20-01 Publication date: October 31 st 2021

A comparative study of liquidity determinants of private and public sector banks

India is one of the few countries in the world, which follows a prescriptive regulatory policy for liquidity management in banks. These policies affect different groups of banks in different ways. The main objective of this study is to examine the liquidity determinants of private and public sector banks in India on a comparative basis to assess the effectiveness of liquidity management policies for each type of bank in India. For this purpose, this study analyses the long-term effect of various macroeconomic, microeconomic, and regulatory policies on liquidity management by both groups of banks from 1996 to 2016. The findings of the study show that public sector banks rely on asset-based liquidity, and private sector banks also rely on asset-based liquidity. In the case of both private and public sector banks, this study found a significant relationship between the liquidity and several explanatory variables – call rate, discount rate, cash reserve ratio, capital to total assets, foreign exchange reserve with RBI and Size (LogTA). It also observed that in private banks some factors – LogTA (in L1); CapitalTA (in L1 & L4) and SLR (in L3 & L4) – had a significant positive effect while other factors – Fxreserve and ROE (in L2) – had a significant negative relationship with the liquidity. Similarly, in public banks, some factors – discount rate (in L4); ROE (in L2 & L3) and NPA/Advances (in L4) – had a significant positive effect while other factors – CapitalTA (in L3 & L4); CRR (in L4); NPA/Advances (in L3), and LogTA (in L1) – had a significant negative relationship with the liquidity. The findings of this study question the appropriateness of applying a similar type of regulatory measures for all groups of banks by the regulators for liquidity creation

A Survey of Institutional Investors’ Investment and Management Decisions on Illiquid Assets

This article reports the results of a survey of nine Dutch (assets under management [AUM] EUR 342 billion) and five Canadian (AUM CAD 203 billion) pension funds and fiduciary managers on the investment and management decisions regarding illiquid assets. The Dutch pension funds in the sample invest 15% of their portfolio in illiquid assets, whereas the Canadian pension funds invest 34%. The authors put forward three reasons for the stark difference in the average illiquid asset allocations: (1) the strong focus of Dutch survey participants on investment costs, which are made available to the public and are higher for illiquid assets, (2) supervisory requirements, and (3) the division of Dutch pension fund assets into a liability matching portfolio and a return portfolio, which potentially leads to liquid assets crowding out illiquid assets. Regarding the management of illiquid assets, many survey participants report that they perform liquidity stress tests and have liquidity management policies to free up cash if necessary. The authors formulate four best practices based on these findings. <b>TOPICS:</b>Pension funds, portfolio construction, developed markets, other real assets <b>Key Findings</b> ▪ Both Dutch and Canadian survey participants most often indicated the risk–return trade-off and diversification benefits as their main reasons for investing in illiquid assets. ▪ For Canadian survey participants, the upper limit to the illiquid asset allocation is between 15% and 80%, whereas for Dutch funds this is 20% to 25%. Correspondingly, strategic asset allocations to illiquid assets are larger and more heterogeneous for Canadian survey participants. ▪ Investors in illiquid assets should regularly perform liquidity stress tests. In addition, they should have an explicit policy regarding which methods to use and in which sequence to free up cash when immediate liquidity needs arise.

Financial Flexibility Robustness

I examine how the robustness of investment opportunities influence firm payout policy and cash holdings. By exploiting new measures, the perturbations of q, a novel counterintuitive yet reasonable fact emerge: low robustness of investment opportunities (high perturbations of q) is able to spur firm propensity to pay dividends, lower repurchase shares, and decrease the cash a firm holds simultaneously. Specifically, firms that are likely to hold fewer amounts of cash when the robustness of investment opportunities is low, which is distinct from the standard channel of uncertainty. These results are consistent with firms' liquidity management policies being significantly shaped by robustness concerns.

Liquidity and Business Performance : A Study of Selected Indian Banks

Banks across the globe are facing liquidity issues. Sound liquidity management can reduce the probability of serious problems. Ideally, a bank needs to maintain enough high-quality liquid assets to meet its liquidity needs to withstand all kinds of possible stress situations. During the early phase of the 2008 financial crisis, many banks did not manage their liquidity prudently. These banks experienced major difficulties despite adequate levels of capital reserves. The Indian banks responded to the crisis by adopting cautious liquidity management policies. Alternatively, higher liquidity could work unfavorably for banks and mean smaller business. In this context, the present study attempted to understand the liquidity management by Indian banks and its impact on their business. The study focused upon selected large public and private sector banks so as to analyze and compare the liquidity and business performance of banks before the financial crisis (2001-02 – 2007-08) and after the crisis (2008-09 – 2018-19). The results revealed that Indian banks preferred higher liquidity in the post-crisis phase. At the same time, they cautiously managed to grow their business, albeit at a slower pace.

Liquidity in the UAE Islamic banks

PurposeThe purpose of this study is to investigate the main factors that affect liquidity risk in the UAE Islamic banks.Design/methodology/approachThe study examines the annual data of the seven UAE Islamic banks over the period 2008-2014. Random effects panel data model is used to estimate the impact of four bank-specific variables and two macroeconomic ones on the liquidity risk of the UAE Islamic banks via their impact on five alternative liquidity ratios.FindingsThe paper finds that bank size has a negative impact on liquidity risk according to two liquidity ratios only, and an insignificant impact according to the other three. Both capital adequacy and London interbank offered rate have significant negative impacts on liquidity risk for three liquidity ratios, and insignificant impacts on two. The effect of credit risk is negative for all adopted ratios, while that of return on assets is negative for one ratio only. Finally, real GDP has a positive effect on two ratios and an insignificant one on the others.Research limitations/implicationsThe study provides insights for policymakers and practitioners to choose appropriate liquidity management procedures. It emphasizes that identifying efficient procedures or policies depends on the liquidity ratio that is used as a proxy of liquidity risk and its definition, in addition to the correlation between the liquidity ratio and liquidity risk. The study also provides some guidance to Islamic banks in the UAE concerning the main factors impacting their liquidity, which can eventually enable them to support their liquidity management policies, in a way that would expand their customer base according to profitability aspects, and not only religious ones.Originality/valueThe paper adds to the relatively limited literature on liquidity risk in Islamic banks. It also is the first study that investigates the determinants of liquidity risk facing Islamic banks in the UAE using five alternative liquidity ratios.

A Survey of Institutional Investors’ Investment and Management Decisions on Illiquid Assets

This article reports the results of a survey of nine Dutch (assets under management [AUM] EUR 342 billion) and five Canadian (AUM CAD 203 billion) pension funds and fiduciary managers on the investment and management decisions regarding illiquid assets. The Dutch pension funds in our sample invest 15% of their portfolio in illiquid assets, whereas the Canadian pension funds invest 34%. We put forward three reasons for the stark difference in the average illiquid asset allocations: (1) the strong focus of Dutch survey participants on investment costs, which are made available to the public and are higher for illiquid assets, (2) supervisory requirements, and (3) the division of Dutch pension fund assets into a liability matching portfolio and a return portfolio, which potentially leads to liquid assets crowding out illiquid assets. Regarding the management of illiquid assets, many survey participants report that they perform liquidity stress tests and have liquidity management policies to free up cash if necessary. We formulate four best practices based on these findings. © 2021 PMR. All rights reserved.

Islamic finance, contagion effects, spillovers and monetary policy

Purpose– The aim of this paper is to review monetary and systemic liquidity management policies that essentially aim at containing crisis and limiting their spread. A corollary is whether relevant public authorities and market participants have tools at their disposal to deal with a systemic crisis affecting Institution Offering Islamic Financial Services (IIFS).Design/methodology/approach– The method used in this study is an examination of existing literature. This paper considers mechanisms that may help contain a crisis and those that may foster post crisis recovery in the case of conventional and Islamic finance.Findings– The progress made to date to develop money markets accessible to IIFS is commendable; however, it is not sufficient. Licensing IIFS in dual financial systems entails a public authority responsibility linked to the authorities’ accountability for the conduct of monetary policy and systemic liquidity management. Licensing an IIFS entails acknowledging the responsibility of being able to manage a system that includes IIFS. This is feasible and possible, but the issue needs to be addressed directly. In a crisis monetary policy and systemic liquidity management will be at the forefront of the stabilization efforts.Originality/value– The experiences of Bahrain and Malaysia in developing a monetary policy and systemic liquidity management framework for their jurisdiction are assessed. The paper identifies also channels of potential spillover effects from conventional to Islamic finance.

From optimisation to resilience: The changing nature of the risk reward conversation as seen through Westpac's capital and liquidity management policies

This paper describes three insights into the use of risk-measurement models that further enhance the risk-management processes at Westpac: (1) Optimisation opportunities apparently on offer from advanced Basel II models led to the formalisation of a robust challenge process for risk models and the recognition that risk-model outcomes are best thought of as hypotheses that should be continually tested; (2) The recognition that stress testing would not capture ‘unknown unknowns’ strengthened consideration of unquantifiable risks; (3) Finally, the experience from the global financial crisis that continual access to wholesale funding markets could not be assumed deepened the understanding of the role risk models play in maintaining market confidence. Each of these insights tilted the emphasis in discussions at Westpac about enhanced risk measurement from optimisation to resilience.

The ECB's separation principle: does it 'rule OK'? From policy rule to stop-and-go

Prior to and during the first stage of the crisis, the ECB's conduct of monetary policy was consistent with the 'separation principle', which refers to the division between monetary and liquidity management policies. However, it became increasingly difficult to apply as interest rates approached their lower-bound. While it was supposed to guide the ECB's exit strategy, the ECB finally resorted to a 'stop-and-go policy'. The separation principle strongly depends upon the institutional setup in which the central bank operates. We show that the difficulties faced by the ECB are due to an important feature of the monetary union, which economic governance is essentially rule-based. The success of a monetary union crucially depends on the strict compliance to the rules. The breach of the rules forced the ECB to stabilize euro area sovereign debt markets, stretching its mandate and altering the efficacy of the separation principle.

Turkey’s experience with the global crisis: restructuring policies within a financial stability framework

The challenges threatening financial stability have grown owing to the increasing uncertainties in the global markets since the financial crisis. This has led policymakers to grant a larger role to financial stability in their implementations. Accordingly, the Turkish Central Bank modified its existing inflation targeting framework by explicitly highlighting the role of financial stability rather than imposing capital controls solely. Required reserves, interest rate corridor and liquidity management policies are utilized in addition to the one-week repo rate. We conclude that Turkey’s new policy mix has so far been effective at discouraging capital short-term inflows, representing an alternative approach to capital controls.

Financial Constraints, Liquidity Management and Investment

Investment and liquidity management are analyzed in a sector in which firms are exogenously cash constrained and empirical estimates of Tobin's q provide reliable measures of investment opportunity. Across the entire sector, we document substantial realized investment as well as high investment sensitivity to q. Investment is also sensitive to measures of financial market frictions, suggesting that constraints on retention of cash flow distort investment decisions. Liquidity is managed through dividend policy and access to short‐term bank finance, in which bank lines of credit smooth variation in available cash flow and accelerate investment. Using the Kaplan–Zingales method for measuring the degree of financial constraint, we identify substantial differences between investment and liquidity management policies of firms, in which more (less) financially constrained firms in our sample exhibit high (low) investment and liquidity management sensitivity to variables that measure financial market frictions.

Switzerland: 2008 Article IV Consultation: Staff Report; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Switzerland

Switzerland showed impressive growth performance owing to its strong macroeconomic policies and structural reform efforts. Executive Directors emphasized the need to maintain financial stability. They welcomed the well-timed injections of liquidity into the banking system. Directors also welcomed the stress testing framework to improve liquidity risk management, banks’ contingency plans, and liquidity management policies. They commended the monetary policy stance and the strong fiscal performance. They welcomed the Long-Term Sustainability Report and also the extension of the debt-brake rule to incorporate expenditures.