NAB’s Financial Stability at Risk Due to Low Cash Levels and Liquidity Risk

In order to prevent this state from continuing, the office of chief financial officer believes that $1 00 million SAID WOUld cover the risk enervated by low level of cash and liquid securities and guarantee for the bank's financial stability. Types of Risks The main risk faced by NAB from the low cash level is liquidity risk, and there are two risks derived from liquidity risk: contagion risk and funding risk. Liquidity risk refers to an DAD will have insufficient funds to meet its financial obligations when due.

In fact, a low liquidity ratio in one bank could affect the entire system, in other words, it can lead to contagion risk that the payment system collapses as a result of default by ADDIS in general. Hence manage equity adequately could minimize serious problems arise in the future (Jasmine et a', 2012, IPPP). While the funding risk refers to an DAD is difficult to maintain sufficient funds to cover its loans. It is closely related to liquidity risk since failure to rollover liabilities will result in a liquidity crisis for the AD'.

Causes of The Risks There are several causes of the liquidity risk. A liquidity risk could arise due to the mismatch in the maturity of the bank's sources and uses of funds. The maturity mismatch is an imbalance between the average maturity of a ban? Assets and its liabilities. Observed by Agate (2009), approximately half of the funds in banking system are provided by deposits, and the majority of them are in transaction or saving accounts that could be withdrawn immediately. Ender this unreasonable liability structure, when customers withdraw a great deal of deposits, a liquidity risk can be caused. 2. An economic factor can influence the liquidity risk within ADDIS (Somalis, 2010). For example, during a crisis, lenders are likely to panic and cause a run on their DAD to withdraw their funds. On the other hand, a boom in the economic yes could also cause a liquidity risk because of active demands for investment in various industries such as real estate, mining, etc.

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Most funds of these investments are from bank loans, which bring a credit risk (I. E. Borrower defaulting). Once the bank suffer a loss of its assets, the liquidity ratio will decrease thus increase the liquidity risk. 3. Monetary policy could affect the liquidity risk in a bank as well. For example, if the interest rate is expected to decrease in the future, customers will deposit now in order to decrease the loss of wealth. Meanwhile, bank loans will crease because customers will borrow money in the future due to low expected interest rate.

However, when the interest rate is expected to increase in the future, firms' demand for loan will blow up, and customers is unwilling to save money now due to expected high interest rate in the future, hence cause a liquidity shortage which give rise to liquidity risk. Solution NAB is facing a serious condition now where the liquidity ratio is low. It has to come up with several strategies to manage the liquidity risk that is likely to cause a bank to bankruptcy. 1.

The office of CROP believe that about $100 million ADD would solve the robber, because by holding this amount of cash, exchange settlement funds and liquid assets, it is able to maintain the liquidity when unexpected shortages of liquidity occur. Another method to manage liquidity risk is to balance asset and liability of the bank by matching the maturities. In order to do so, the bank deposits should be allocated in well-organized maturities assets. Hence, the demand for liquidity from the matured deposits could be fulfilled from the liquidity of the matured assets (Greenberg and Thacker, 1 995, Pl 72).

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