Liquidity management in local banks : a financial analysis

Abstract

Purpose - This study shall discuss whether the concept of liquidity risk management has evolved along the years and whether it is a crucial element in today's business environment. The study focuses on the various liquidity management practices and analyses the liquidity position of retail and non-retail banks in Malta. Fair value implications on liquidity risk management will also be assessed to determine whether they have a significant effect on the local economy. Design - The objectives were attained through ratio analysis of registered credit institutions as at 31st December 2011 and semi-structured interviews with top management of the said institutions. Value - This dissertation seeks to analyse the liquidity position and management best practices of retail and non-retail banks in Malta, so as to highlight any significant differences that may arise between both categories. Findings - The results show that retail banks are more liquid than non-retail banks. Although non-retail banks have higher levels of liquid assets, retail banks have a more solid and robust funding structure. Retail banks' low reliance on the wholesale market together with a significant amount of retail deposits helps them to achieve their banking objectives with the least possible exposure to funding liquidity risk. Common features in liquidity management best practices are present with ALCO, Liquidity Maturity Mismatch and Stress Testing given significant importance. Reporting differences arise between retail and non-retail banks with the latter performing more frequent reports for head office purposes. Fair value implications on liquidity were considered to be negligible for both retail and non-retail banks. Conclusion - Retail banks should maintain their low level of loan-to-deposit ratios while improving their diversification of asset holdings. Non-retail banks on the other hand should move away from inter-bank funding and diversify their efforts towards more stable sources of funding so as to improve their liquidity position. Notwithstanding such findings, banks are urged to maintain and improve such positions given the stringent regulatory requirements that are yet to come.