LIQUIDITY RISK MANAGEMENT AS A LONG – TERM STRATEGIC PLANNIG TOOL

LIQUIDITY RISK MANAGEMENT AS A LONG – TERM STRATEGIC PLANNIG TOOL

Zhandos Ramazan

Master's degree student of the Higher School of Economics of KazGUU University, Republic of Kazakhstan, Nur-Sultan

ABSTRACT

In the modern world, it is difficult to imagine a field of activity in which banks would not take part. The daily tasks facing a person of the 21st century are inextricably linked to interaction with banks, making purchases at points of sale, applying for a mortgage to buy a home or buying a car on credit, and businesses, in turn, have to carry out many operations to transfer funds to pay or receive payments for goods and services. And this is only a small part of what a modern bank has to deal with. All these opportunities are provided to us by banks, and for this reason, banks are an integral part of the life of any economy.

As of January 1, 2021, 26 second-tier banks operate in Kazakhstan, including 15 banks with foreign participation and 1 bank with 100% government participation. The banks ' assets, in turn, amount to 31,171. 7 billion tenge, in the structure of which 15,792. 1 billion tenge is the main debt of borrowers, in other words, the loan portfolio. In turn, the deposits of the bank's clients amount to 21,559. 2 billion tenge, thus the share of assets to GDP is 44.7%, the share of the loan portfolio to GDP is 22.6% and the share of deposits to GDP is 30.9% (NBK, 2021).

The activities of the banks themselves and their sustainability affect not only the bank's shareholders and their employees, but also customers who have loans and credit lines, deposits and other products of the bank. In addition, loans have a long-term impact on inflation and the economy as a whole. After all, if the effect of the "bubble" that occurred in 2008 due to the mortgage boom is produced, then the country will have a low level of free cash to buy goods and services. In turn, it affects the consumer ability of the population and businesses, thereby reducing the growth of the economy (NBK, 2019). Also, in the period from 2005 to 2007, Kazakhstan's second-tier banks were funded by funds from Europe, which is about 44% of the country's GDP was raised in foreign currency. These funds were mainly directed to retail customers in the form of mortgages, as the requirements became tougher with the onset of the global financial crisis, banks lost access to foreign financing and the non-commodity sector of the economy showed a slowdown in growth (IMF 2014).

Keywords: Kazakhstan's banking sector, financial liquidity, assets liquidity.

1. Introduction

The concept of banks is extensive and since everything is considered on the example of Kazakhstan, based on the law "On Banks and Banking Activities", a bank is a legal entity that is a commercial organization that is authorized to carry out banking activities. In turn, banking activities include: accepting deposits, opening and maintaining accounts, cash, transfer and other types of operations, loan operations, exchange operations, and much more (the Law of the Republic of Kazakhstan)

A loan is an agreement where one party receives something of value and agrees to pay for the product or service later. Thus, when you give someone a loan, you have credit risks or the likelihood that your debtor will not comply with the terms of the agreement. (FRM, 2018)

Liquidity is a measure of the cash and other assets that banks have available to quickly pay bills and meet short-term business financial liabilities, while capital is a measure of the resources that banks have available to cover losses (Federal Reserve, 2019, https://www.federalreserve.gov/faqs/cat_21427.htm).

For banks, loans are assets, or in other words, 14.5 trillion loans issued are assets of banks. Since they are issued in the form of a loan by transferring funds, it is very important to look at the quality of these assets. For example, if a bank has a high level of credit risk on assets or loans issued, then the bank's financial position cannot be called healthy, which means that the bank, in turn, will not be able to meet its liabilities.

Relevance of the research topic. In 2019, an unprecedented event took place in Kazakhstan for banks, namely the "Asset Quality Assessment" (hereinafter referred to as the "AQR"). According to the press release of February 28, 2020, according to the results of the AQR, banks are stable at the system level, and at the level of individual banks participating in the AQR. There are no risks for depositors of the AQR member banks (NBK, 2020).

After a while, in February 2021, for example, Tengri Bank JSC and Asia Credit Bank JSC were deprived of their licenses. The reason for the revocation of licenses of these banks is the poor quality of assets of JSC "Tengri Bank" at the time of revocation of the license, 83% of loans issued were non-repayable, in turn, 70% of loans issued by JSC "Asia Credit Bank" were overdue for more than 90 days (NBK, 2021). Although the deprived banks were not participants of the AQR, but at the system level, this indicates a poor level of liquidity of banks ' assets, in addition, in 2014, the total number of banks was 38 units, by the time of consideration of this study, as mentioned above, only 26 banks remained (IMF, 2014). Thus, the number of banks in less than 7 years decreased by 12 units, in turn, the volume of bank assets as of 2014 was 39% of GDP, thus this indicates an increase in the share of banks in the economy or an increase in the number of loans in the economy (Committee on Statistics of the Republic of Kazakhstan, 2021).

Since the main reason for the revocation of the license and further liquidation of banks is not a high-quality loan portfolio of banks associated with the non-repayment of loans issued, this can also display signals in the economy that borrowers in Kazakhstan can not repay their obligations and thus display the picture of the economy. After all, if the borrower does not service his debt according to the loan agreement, then this is accompanied by some economic reason in the form of a decrease in economic activity, a high level of debt burden, high borrowing costs, and so on. Thus, the research addressed the following questions:

1. How does the economic situation of the country affect the liquidity of banks;

2. Is it possible to use macroeconomic factors for long-term liquidity planning;

3. What liquidity indicators were registered in the banking sector of Kazakhstan during the crises.

Research Hypothesis: If the liquidity of banks at the system level reflects the current solvency of the population and businesses with obligations, then there should be a dependence on the level of the country's economy and/or its structure. Thus, managing the liquidity risk can be used as a tool for long-term planning, since the structure of the economy of Kazakhstan over the years of independence is focused on the commodity market, in other words, on oil and gas.

2. Literature review

The quantitative approach is the only one for research within the framework of this work, since it examines the effects of the measured data on each other, in turn, linear regression is used as a tool for analyzing the influence of variables in statistics. But there are rules that must be followed, one of them is the adequacy of the model, there must be a relationship between the variables, there must not be a correlation with errors, and much more. Thus, having evaluated the linear regression model taking into account the above conditions for it, you can apply this estimate to form a conclusion from the results obtained.

In corporate finance, it is defined by liquid assets that are quickly converted into cash, this is necessary to determine the amount of liabilities that can be repaid immediately or up to one year. Thus, the liquidity ratios determine the short-term stability of the company. In turn, in corporate finance, long-term instruments of financial stability are also defined, they include the total debt ratio, debt-equity ratio and equity multiplier, in a general sense, these are indicators of the sources of asset formation, in other words, the determination of the company's own participation in the activities.

In risk management, there are two types of liquidity: financial liquidity and market liquidity. Both types of liquidity have their own risks and at the system level can significantly affect the country's economies. It highlights the fact that in the US, the crisis caused in 2007-2008 arose precisely because of the liquidity risk, that is, mortgage loans were overvalued, which in turn were a pool on the stock market in the form of CDOs. Thus, increasing lending to the economy, this resulted in a financial and economic crisis. In other words, at the system level, liquidity risks cannot be ignored and stress-testing methods should be used for the financial stability of the banking sector with reference to the country's macroeconomic indicators.

Kazakhstan in 2019 held an unprecedented event as an AQR, 14 banks were included in the sample and accounted for 87% of the total number of banking assets of the country. According to these reports, there were no risks at the system level, but since the report was published already in 2020 with the start of the coronovirus pandemic (COVID 19), it is still unknown how relevant this conclusion is. However, the AQR report highlights the fact that banks need to improve their business models, including having stress-testing models with the country's macroeconomics indicators, and thus study any possible scenarios and their impact on the bank. And it is also a strange fact that after the AQR, the NB revoked the license of two banks, namely JSC "Tengri Bank" and JSC "AsiaCredit Bank". In addition to the revocation of the license, it is also observed that the financial statements for 2018 of these banks did not reflect any risks, and also claimed the normal state of the loan portfolio. While the reason for the revocation of licenses from these banks was still a poor-quality loan portfolio.

Describing the above-mentioned situation of the banking system of Kazakhstan and the availability of liquidity instruments, as well as the need to determine the impact of the macroeconomic situation on the banking sector, this paper will further apply a quantitative approach. In turn, the statistical method of analyzing the quantitative approach will use linear regression to determine the relationship between the data parameters.

Data analyses

Considering the structure of the banking sector in Kazakhstan, it can be noted that the main direction is lending, which occupies 67% of the total share of assets. But, in turn, it is impossible to consider loans or loans to determine liquidity, since the share of "problem" loans increased annually until 2013, after which, despite the annual increase in assets, the share of "problem" loans decreased, even despite the pandemic in 2020.

Because of the above, the asset liquidity indicator identified absolutely liquid assets, which occupy a share of 12% of the asset structure of the banking sector of Kazakhstan from 2004 to 2020. Regarding the determination of financial liquidity, 9 indicators of liabilities were regressed to determine the dependence on absolutely liquid assets. Among the 9 indicators of liabilities, interbank deposits and deposits of clients of the banking sector of Kazakhstan were statistically significant. In turn, interbank deposits could not be used in the study due to the large difference between the actual data of deposits of clients of the banking sector of Kazakhstan and the regression model, as well as the low level in the structure for the periods under review.

After excluding interbank deposits from further research, a regression was performed between absolutely liquid assets and customer deposits. In turn, time series were also not used to predict customer deposits, and GDP and the economically employed population were used to determine the relationship. The correlation between these indicators turned out to be more than 90%, but the statistical significance slightly exceeds the specified one by more than 3%. Since Kazakhstan's GDP and the economically employed population are important macroeconomic indicators, these indicators were used for further research.

It should be noted that the Statistical Committee publishes the main macroeconomic indicators once a year. In this regard, the analyzed data in this study additionally contains 17 observations. The GDP and the economically employed population of Kazakhstan were also regressed by time series, with a correlation of 90% and within the framework of statistical significance. If we look at the forecast historical data, then there is a pattern that during crises, the share of customer deposits in the structure of liabilities of the banking sector of Kazakhstan increases. As well as an increase in the share of deposits of customers of the banking sector of Kazakhstan, but despite this, the forecast results from 2021 to 2023 were higher than the historical ones up to 4%, but if we consider the average forecast, the share of deposits is 64%, while the historical 61%. The deviation is insignificant if we take into account the fact that the share of customer deposits in 2010 was 57%, and in 2020-69%, that is, the annual growth was 1.2%. And if the forecast model was based on historical data, then by 2030 the share of deposits in the banking sector of Kazakhstan would be 81%, and the average forecast value would be 75.6%, which is 11.6% more than the forecast model based on regression.

As for absolutely liquid assets, the forecast model based on the regression was higher by 2% or from the historical average share of 11% to the average forecast share of 13%. Although it is worth noting that in comparison with the forecast model of customer deposits, absolutely liquid assets had historical indicators above the average forecast. For example, in 2015, the share of absolutely liquid assets was 17%. In addition, in comparison with the deposits of clients of the banking sector of Kazakhstan, absolutely liquid assets do not have a dynamic growth in 2020 and are at their historical minimum since 2011. To understand this difference, it is necessary to consider the entire asset structure of the banking sector of Kazakhstan, that is, in 2021, the share of loans was 51%, while in 2015, the share of loans was 65% and reached a maximum of 86% in 2013. In turn, in 2015, the share of interbank deposits was only 5%, and the share of securities was 0%, while at the end of 2020, the share of interbank deposits was 15%, and the share of securities was 21%. In other words, since 2016, the banking sector of Kazakhstan has been diversifying its asset structure, but given the fact that interbank deposits are a tool for restraining costs, and the securities market requires high competence, a significant reduction in the share of absolutely liquid assets during the crisis is not correct.

Conclusion

To predict macroeconomic indicators, time series regression was used separately for each indicator, so the forecast horizon was determined in 10 years, starting from 2020 to 2030. Customer deposits have a moderate growth rate until 2025. But in order to fully understand the situation and the forecast model of deposits in the banking sector of Kazakhstan, a model of the total assets of the banking sector of Kazakhstan was built by time series, where the share of customer deposits is determined. There is an increase in the share of customer deposits in the event of a crisis, that is, the share of customer deposits is growing in 2008, 2013 and 2020. The average historical value is 61%, and the average forecast value is 64%. Since the model was based on macroeconomic indicators, the growth of GDP and the economically employed population will increase the share of deposits of customers of the banking sector of Kazakhstan. For absolutely liquid assets, the average historical value is 11%, and the average forecast value is 13%. Thus, the use of macroeconomic indicators leads to moderate growth in the case of forecasting and requires the introduction of additional parameters to be able to accurately predict.Summing up the results of this study, it is necessary to understand that for the forecast model, it is not enough to use only a macroeconomic indicator such as GDP and economic employment. Although these indicators respond to the deposits of customers of the banking sector of Kazakhstan, the indicator of the banking sector itself is not segmented. For example, the age, gender, wealth, industry of the depositor's economy and other indicators, and for further research on the issue of liquidity, it is necessary to conduct research and model the available data.

Thus, the quality of research on the financial liquidity and asset liquidity of the banking sector will increase, help to build more accurate forecasts and models that will signal potential risks and help in making decisions for the sustainable stability of the banking sector in Kazakhstan.

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