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Approved by the Resolution of Board of National Bank of the Azerbaijan Republic of December 29, 1999 (the Protocol No. 12) the Register No. 137

RULES OF LIQUIDITY MANAGEMENT OF BANKS

These rules are prepared on the basis of the Laws of the Azerbaijan Republic "About National Bank of the Azerbaijan Republic", "About banks and banking activity in the Azerbaijan Republic" and determine policy of National Bank of the Azerbaijan Republic on liquidity management of banks.

With development of the market relations participation of banks in these relations increases that in turn increases their responsibility on effective management of their liquidity and timely accomplishment of the obligations. For accomplishment of the obligations bank management, having chosen the most effective method, involves all main departments and departments of bank in process of management of liquidity.

I. General information

1. With attraction of financial resources (in the form of term deposit, current accounts, etc. - further "deposit") the bank, according to approved with transferred it these means (further - "depositor") conditions, undertakes obligations on their return as appropriate. The trust of the depositor to accomplishment of the obligation by bank is considered the most important achievement of bank and the trust to it clients gives it the chance to attract new depositors. Failure to carry out in any kind of obligations in the terms coordinated with the depositor shakes trust of the public to bank and, as a result of it, to all bank system.

2. For normal implementation of all payments and short-term obligations for write-off of funds from accounts, receipt of cash and current assets the bank management shall plan liquidity. The liquidity risk is considered the largest risk which deposit taking institutions face. Inability is effective to control liquidity situation of bank and lack of preparation of necessary plans for extreme cases often become the reason of liquidity crisis and even loss of solvency.

The major factor considered in management of bank liquidity is achievement of balance during investment of funds for longer terms for the purpose of receipt of big profit with the need for short-term liquid means. Thus, questions of liquidity shall be counterbalanced with benefit reasons. The need for means for bank liquidity shall not depend on benefit reasons at all.

3. In a broader sense liquidity shall be understood as capability of bank timely to accumulate on correspondent accounts at reasonable price enough cash or in sizes of not cash equivalent to them for the purpose of timely accomplishment of the obligations by bank (including off-balance obligations, agreements on issuance of credit, credit lines, etc.). That is it is capability to provide the need of deposits for other raised funds, for payment and increase in assets. Discrepancies in payment due dates of assets and liabilities shall be regarded as liquidity risk. However the full compliance of payment due dates and terms of use of the available means is unreal.

Effective management of liquidity means that the bank is rather informed on liquidity situation and discrepancies, and it takes necessary measures to decrease in risk.

4. The need for liquidity is determined by use of both parties of balance. The need for liquidity for the asset item is provided with acquisition and storage of means which can be quickly implemented, of securities, means on correspondent accounts in National Bank and in commercial banks. Accumulating of means in the liability item of balance, i.e. at the expense of the credits obtained from commercial banks, or from National Bank is possible by acceptance of deposits from legal entities and physical persons. In extreme cases banks are forced to sell some illiquid funds as the credits, or to borrow means from the interbank market, or to use overdrafts with the permission of National Bank. The effective strategy of liquidity management means active management both assets, and liabilities of bank.

II. Liquidity analysis

5. Before banks, planning liquidity, paid attention to assets (asset management) or liabilities (management of liabilities) of balance. However modern methods of bank work in liquidity management require effective use of both parties of balance. And it provides efficiency of planning of liquidity.

6. In case of shortage of means the bank can sell part of the assets. Because of frequent purchase and sale of certain asset types, usually their market price is known.

Because of the publication of market prices of these asset types in various sources (in seal, announcements, etc.), the bank in short terms can find the buyer for these assets on fair market price. Such assets are called quick assets because they without any work can be turned into cash (here foreign currency, fast-implementable securities issued by the Azerbaijani government which payment begins in several days, or issued by National Bank of the obligation, etc. also belong).

7. In the developed countries having the organized and effective secondary security market, the securities issued by the government, or the companies can be liquidated by most the parties participating in the operations performed in the market. In such way these securities can be sold without damage in short terms. Each bank having vneshnelikvidny marketable securities shall know that the term of calculation for securities depending on their type and settlement system happens to 5 (sometimes in addition more) the working days. At the same time it is necessary to consider also time zone of the corresponding markets. During investment of capital in the securities of foreign states which are considered highly liquid and safe it is also necessary to consider and the risk connected with foreign currency.

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