Liquidity Risk In Banking

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This article named as “liquidity risk and performance of banking system” this article written by “Ahmad Arif”. In this article liquidity risk define for understanding and explain impact of liquidity risk on the performance of banking system. Liquidity risk is that the bank may not be able to meet its obligation. Due to the poor credit controls bank face that type of risk. In this article author says that strength of banking system plays an important role in the economic stability of growth in the country. Banks are the main part of financial sector of any country’s economy. Author says that banks also facilitates many companies and industries and it also creates the main role for the emerging market growth due to the investment, therefore employment …show more content…

This risk may not be covered only by risk management practices. For to overcome this liquidity risk use the different methods like derivatives (it is the financial instrument which use to mitigate the risk). Liquidity risk cause collapse of the banks but it can be reduce or eliminate through pledging, cash reserve and mortgages.
Research problem (impact of liquidity risk and performance of banking system) is very important to address. In this article author deeply understand and address the problem through practiced implications. Author’s claim is valid, in which he addressed the problem by different methodologies like, this liquidity risk may be mitigated by maintaining sufficient cash reserves, raising deposit base, decreasing the liquidity gap and non-performing loans. And this claim of the author is valid for the …show more content…

Liquidity risk arises from a banks inability to meet its obligations, when it comes to pay without incurring any unacceptable losses. Liquidity risk always affect negatively on banking performance. Author claim is valid through different evidence. He ensure that risk from research methodology which include “Journals, Books, Annual Reports and unstructured interviews” from risk managers of different 22 banks from the period of 2004-2009. Pakistan banking system is a key engine of economic growth and main lender of public and private sectors. State bank of Pakistan regulate all the banks in Pakistan. Liquidity risk is the main challenge for the banks, when liquidity risk increase, it affect the economic condition where demand of depositors increase for withdrawals. Banks have not the enough balance to provide depositors due to the late payments of borrowings. And due to this many banks are collapsed. In this article author says managing liquidity risk through various methods like derivatives, pre-defined and well established mechanism for identification and mitigating the liquidity risk. Banks should aware about the credit worthiness of borrowers and five C’s of borrowers. Liquidity risk managed by pledging, cash reserves, and mortgage and by finding shortfall and decreasing liquidity gap, enhancing their investment in different

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