Measuring Bank Liquidity Using Publicly Available Information Assignment

Measuring Bank Liquidity Using Publicly Available Information - Assignment Example In comparison to savings banks in Germany, big commercial banks have a volatile return on equity. In the UK, Barclays, HSBC, RBS, and Lloyds are the big commercial banks that dominate the market thereby causing limited competition. However, in the US, financial systems are market-based and thus financed from the issue of securities. Single factor sensitivity analysis is used to measures changes in the portfolio in relation to interest rates, share prices, and exchange rate while scenario analysis uses simulation to determine risk (Drehmann and Nikolaou 2010, 50). Liquidity risk will indicate a bank’s ability to meet short-term and long-term liabilities for going concern purpose. Higher proportions of short-term debts will indicate a higher liquidity risk. Such banks will be subjected to a higher minimum capital requirement by the regulatory authority. The regulatory capital is then linked to the riskiness of its asset portfolio. To evaluate liquidity both on and off-balance sheet items can be added and weighted to evaluate the correct value of the risk-adjusted assets. Tier 1 capital will entail retained earnings, equity, and reserves while tier 2 capitals will compose revaluated items, unrecognized reserves, and gains on securities. Concentration measurement gives a clear picture of the competitiveness of a bank in the international banking industry. The indices used for measurement are the Herfindahl-Hirschman index and the Gini coefficient. Both the Herfindahl and Concentration ratio methods take into account the largest institutions in account when determining their values. Structure-conduct-performance analysis deals with the concentration of firms in the market, individual conduct of firms and profitability. It is evidenced that there is a statistical econometric correlation between the measure of market structure in the banking industry and profitability. Therefore, the market share of the international bank will indicate its ability to mitigate liquidity.