Liquidity Risk .


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Liquidity Risk

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Diamond & Dybvig Model Game Theory In numerous monetary circumstances, operators returns rely on upon the activities of different specialists. In such a circumstance, specialists must think deliberately. Market analysts utilize amusement hypothesis to portray such circumstances. John ("A Beautiful Mind") Nash built up an idea called the Nash harmony.

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Nash Equilibrium A Nash harmony happens when each player in a diversion is playing their best technique given the methodology that alternate players play. Financial analysts trust that results of vital circumstances are probably going to be all around portrayed by Nash harmony. Since each person in a Nash eq. is playing there best system given the activities of others, nobody has any motivating force to change their methodology separately.

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Bank Depositors Game Banks have exceptionally illiquid resources (advances) and commitments to reimburse their investors in full whenever. On the off chance that the greater part of the contributors at a bank pull back their assets in the meantime, the bank should offer their credits at a markdown, and they won\'t have enough subsidizes to pay the majority of their investors. In the event that the majority of their investors keep their cash in the bank, most banks will have the capacity to reimburse the greater part of their contributors with premium. Along these lines, the result to any individual investor relies on upon what different contributors choose to do.

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Bank Run Game: Withdraw or Don\'t Withdraw Depositors every store $1000 at 10% premium. They can pull back their assets before gathering premium or keep their assets with the bank. The correct hand table shows pay-offs for every choice under two conceivable circumstances. Every single other investor keep their assets in the bank and the bank survives. Every other investor pull back assets and the bank must exchange. Settlements If an individual keeps their assets with the bank and every other person does in like manner, everybody gets their assets with premium. On the off chance that an individual doesn\'t pull back, however every other person does, the bank will have nothing left to pay the person who gets nothing. In the event that the individual contributor pulls back however nobody else does, the investor loses just premium. In the event that an individual investor pulls back and every other person does, they have some shot of getting a few assets (say $500) back.

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Bank Deposit Game has Multiple Equilibria If nobody else pulls back their assets, the best methodology of any individual is not to pull back their assets. In this way, a circumstance in which nobody pulls back their assets and the bank pays enthusiasm to all is a Nash Equilibria. On the off chance that everybody pulls back their assets, a people best system is to pull back before every other person does. Along these lines, a bank run, a circumstance in which everybody pulls back their assets and a bank is compelled to exchange its benefits is likewise a Nash balance.

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Bank Runs The wonder in which all contributors contend to pull back their assets in the meantime is known as a bank run or a bank freeze. Contributors need finish data about the estimation of banks resources. On the off chance that contributors trust that there is a critical portion of credits which won\'t be reimbursed, investors may have a motivating force to quickly pull back assets. Bank stores are first come, first serve. On the off chance that you pull back your assets before the bank proclaims misfortunes you may not endure by any stretch of the imagination. Further, regardless of the possibility that you trust that banks resources are sound you may have a motivating force to quickly pull back, on the off chance that you trust that different contributors will likewise pull back their assets.

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Northern Rock Northern Rock is a British keep money with a specific subsidizing profile. The bank loans intensely in home loan market and raises an expansive share of its assets in business paper showcase and other unstable liabilities. In late 2007, with turmoil in business paper advertise, contributors started to question whether they would recover their assets.

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Source BBC Report

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Effects of Lender of Last Resort The certainty brought by the information that the national bank will give liquidity on account of a bank run, can really lessen the possibility that a bank run will happen. Then again, the feelings of dread of contributors of insolvencies are an essential wellspring of train in the economy. A moneylender of final resort may urge contributors to overlook the inordinate hazard taking of their banks, urging banks to go out on a limb. Moneylenders of final resort supports moral peril.

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Liquidity is a result of Banks are productive as an undertaking through their entrance to moderately shoddy subsidizing from center stores. Contributors will loan cash to banks at low financing costs on the grounds that the banks offer one of a kind liquidity benefits that encourage standard exchanges and ensure liquidity position of investors riches. Be that as it may, if banks are untrustworthy in giving liquidity benefits, their entrance to shoddy subsidizing and at last their benefits will vanish.

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Liquidity Services Banks give various liquidity administrations Cash Withdrawal Checking Electronic Payments Electronic Transfers These require Interbank exchanges: Payments between banks

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Cash Demand is moderately unsurprising, however subject to regular components. HK Currency subject to sharp yearly ascents popular. Source: HKMA, CEIC

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Transactions at Hong Kong Interbank Clearance Ltd. Jan 2006: HK$12trillion (approx.) Large and Volatile Fluctuations in Transactions Volume and Available Reserves

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Interbank Transactions Most installments (by esteem) are done through checks, Mastercards, charge cards, and electronic exchanges. Last settlement of these exchanges will be done through the records that banks hold at the HKMA, called clearing equalizations . Not at all like USA, banks confront no base save necessity on records at national bank. Just prerequisite is must meet commitments .

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Daily Liquidity Management Banks can obtain intraday liquidity premium free from the national bank. Banks may obtain overnight liquidity from: Other banks at HIBOR rate Central bank markdown window Discount Window Rate: 150 focuses above base rate

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H ong Kong I nter B ank O ffered R ate: The rate on which one bank stores cash at another purpose behind here and now loaning.

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Repo Operations Borrowing from national bank and other here and now interbank acquiring is finished with repo operations with Exchange Fund Paper. . Repurchase Agreements: A method for here and now loaning. A "borrower" will offer government securities to a moneylender and all the while consent to repurchase them at a later date at a higher cost along these lines paying premium.

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Exchange Fund Bills Exchange Fund Bills and Notes are Hong Kong dollar obligation securities issued by the Hong Kong Monetary Authority (HKMA). The Exchange Fund Bills and Notes constitute immediate, unsecured, unqualified and general commitments of the Hong Kong SAR The Exchange Fund Bills and Notes Issuance Program guarantees the supply of a lot of great Hong Kong dollar obligation paper, which can be utilized as exchanging, venture and supporting instruments. Approved Institutions that keep up Hong Kong dollar clearing accounts with the HKMA can utilize their possessions of Exchange Fund papers to get overnight Hong Kong dollar from the Discount Window. A dynamic essential and optional market for the exchanging of Exchange Fund Bills and Notes, and the foundation of a dependable benchmark yield bend for up to 10 years has encouraged the improvement of an advanced Hong Kong dollar obligation advertise. Source: HKMA Website

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Liquidity Ratio: All approved establishments in Hong Kong are required to meet a base month to month normal liquidity proportion of 25%. This is figured as the proportion of liquefiable resources (e.g. attractive obligation securities and advances repayable inside one month subject to their particular liquidity change elements) to qualifying liabilities (essentially all liabilities due inside one month). - GUIDE TO HONG KONG MONETARY AND BANKING TERMS

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Determinants of Banks Liquidity Banks will have an arrangement of fluid resources (money, securities, and so forth.) and illiquid resources (advances, substantial & elusive) Deposits/Liabilities are isolated into two sorts Core Deposits Checking & Savings Accounts, MMDA, Small Time Deposit Non Core Funding Large Time Deposit/Jumbo CDs, Borrowings, Bond Securities, and so forth. Unstable Liabilities : Short-term (Maturity < 1 Year) Non-Core

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Liquidity Risk & Profits Banks liabilities are accessible to investors on request. Banks must sit tight long time for reimbursement for their credits. Banks confront chance that numerous contributors will pull back assets in the meantime compelling the bank to sell resources at high cost. Banks likewise keep some fluid resources, for example, money, here and now stores, or government securities however these procure low premium. Center stores are thought to be more steady and probably not going to be pulled back rapidly. Procurement expenses of non-center liabilities are much lower. May be depended to close liquidity crevice.

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Measuring Liquidity Risk Asset Indicators Loans are the slightest liquidity kind of benefit. Keeps money with moderately high measures of advances are illiquid. Net Loans to Assets, Banks confronting a liquidity deficit undercut term securites for money. Firms with loads of such securities are moderately fluid. Here and now Investments to Assets. Money to Assets See Page 5 & 10 of UBPR

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Liabilities Indicators Core Deposits are the most steady and to the least extent liable to leave unusually. Here and now non-center subsidizing is the minimum stable Core Deposits to Assets S.T. Non Core Funding to Assets

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Trends in Demand Deposits in HK

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Structure of Liabilities Banks can control the stream of stores by offering just items with particular developments and least adjusts and differing the relative rates paid by these terms.

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Loan-Deposit Ratio Headline mea

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