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Liquidity Services
Banks provide a number of liquidity services
Cash Withdrawal Checking Electronic Payments Electronic Transfers
150000
140000
130000
120000
110000
100000
90000
Interbank Transactions
Most payments (by value) are done through checks, credit cards, debit cards, and electronic transfers. Final settlement of these transactions will be done through the accounts that banks hold at the HKMA, called clearing balances. Unlike USA, banks face no minimum reserve requirement on accounts at central bank. Only requirement is must meet obligations.
Transactions at Hong Kong Interbank Clearance Ltd. Jan 2006: HK$12trillion (approx.)
Aggregate Transactions/Aggregate Clearing Balances 35000.00 30000.00 25000.00 20000.00 15000.00 10000.00 5000.00 0.00
Electronic Payment 16%
Ratio
Checks 5%
Ja n0 M 0 ay -0 Se 0 p0 Ja 0 nM 01 ay -0 Se 1 p0 Ja 1 n0 M 2 ay -0 Se 2 p0 Ja 2 nM 03 ay -0 Se 3 p0 Ja 3 n0 M 4 ay -0 Se 4 p0 Ja 4 nM 05 ay -0 Se 5 p05
Transfer 79%
Liquid Assets
Treasury Bills
Other Government Securities
Lending to/Deposits at Other Banks Purchasing Securities for Resale (Repos) Commercial Paper
Hang Seng BEA 6021 3655 55907 32251 6270 3970
Cash & Current Balances at Banks and HKMA Money Placed w/Banks within one month Treasury Bills
An active primary and secondary market for the trading of Exchange Fund Bills and Notes, and the establishment of a reliable benchmark yield curve for up to 10 years has facilitated the development of a sophisticated Hong Kong dollar debt market.
Source: HKMA Website
Liquidity Ratio:
All authorized institutions in Hong Kong are required to meet a minimum monthly average liquidity ratio of 25%. This is calculated as the ratio of liquefiable assets (e.g. marketable debt securities and loans repayable within one month subject to their respective liquidity conversion factors) to qualifying liabilities (basically all liabilities due within one month). -GUIDE TO HONG KONG MONETARY AND BANKING TERMS
Liquidity Ratio
2003
2004
43
43.5
44
44.5
45 Hang Seng
45.5 BEA
46
46.5
47
47.5
Customer Relationship model for loan expansion. Dont turn good borrowers away for want of liquidity.
Example:
A bank has the following liability positions
Volatile Deposits Vulnerable Funds Core Deposits Liquidity Reserves 25 24 100
Currently has $135 million in loans. Has had as much as $140 million viewed as potential. Anticipates 10% loan growth. How much liquidity should we keep? (.95*25)+(.3*24)+(.15*100)+(154-135)=64.95
Liquidity Indicators
Bank managers, regulators and analysts may watch a number of indicators
Cash & Bank Deposits Government Securities Total Assets Total Assets
Depositors each deposit $1000 at 10% interest. They can choose to withdraw their funds before collecting interest or keep their funds with the bank. The right hand table shows pay-offs for each decision under two possible situations.
All other depositors keep their funds in the bank and the bank survives. All other depositors withdraw funds and the bank
1. 2. 3. 4.
Withdraw
Dont Withdraw
Payoff: $500
Payoff: $0
Dont Withdraw
Payoff: $1000
Payoff: 1100
The phenomenon in which all depositors compete to withdraw their funds at the same time is called a bank run or a bank panic. Depositors lack complete information about the value of banks assets. If depositors believe that there is a significant fraction of loans which will not be repaid, depositors may have an incentive to immediately withdraw funds. Bank deposits are first come, first serve. If you withdraw your funds before the bank declares losses you may not suffer at all. Further, even if you believe that banks assets are sound you may have an incentive to immediately withdraw, if you believe that other depositors will also withdraw their funds.
Bank Runs
Remedial Responses to Banking Panics The damage from a banking panic are so severe that central banks often step in during a crisis and provide almost unlimited liquidity. An emergency source of liquidity is the lender of last resort. Central banks are the natural lender of last resort as they can create infinite liquidity through their control of the money supply. Before 1993, there was no central bank in Hong Kong. Role of lender of last resort was taken by note issuing banks.