Capital Adequacy (Solvency) and Liquidity Risk Management: Analysis, Evaluation, and Possibilities for Improvement

Abstract

The main purpose of the present research is to analyse the supervision, capital adequacy (solvency) and liquidity prudential norms, limits and requirements of commercial banks operating in Lithuania, as well as to assess the quality of capital adequacy and liquidity risk management impact on the banking industry.The paper consists of two main parts: the analysis of literature and legislation, and the research, its results, recommendations, and conclusions. The first part reviews the theoretical analysis of the level of banking supervision and capital adequacy, liquidity prudential standards value. The authors have examined the banks' supervising authorities and the regulation of their activities. There were are presented prudential standards of capital adequacy and liquidity for banks operating in Lithuania, their values'change after the Basel III reforms, and the scientific opinion about their development and tightening standards.The authors have carried out a study of the analysis of capital adequacy and liquidity prudential requirements, their evaluation and possibilities for improvement in banks operating in Lithuania. The analysis consists of the assessment of assets and liabilities of banks ensuring the prudential standards depending on the type of risk. The research revealed that the most important in banks' capital adequacy and liquidity risk management is quality control and the harmonization of bank assets and liabilities. Besides, it is offered to review the calculation of requirements and procedures, to impose additional limits to ensure the basic standards and an efficient banking security.

The effects of Tier-1 capital to risk management and profitability on performance using multiple fixed effect panel data model

“…Banks can use several ways to give signals to investors and regulators relating to the ability of these banks to deal with risks to avoid regulatory oversight. Findings of this research reinforce the findings of previous research by Žuk-Butkuvienė et al (2014) that conducting the analysis of the quality of capital adequacy and liquidity of the risk management would have an impact on banks, banks’ most important ability in risk management was capital adequacy while liquidity was the control of the quality of banks’ assets and harmonization obligations. In addition, there is a relationship between capital adjustment and banks’ risk, thus an increase in the capital buffer will reduce banks’ risk (Zheng et al , 2012).…”

“…The findings of this research are consistent with the signaling theory and support findings of the research by Goddard et al (2010), who proved that capital had a negative effect on profitability, but are contrary to findings of some previous empirical research which discovered that tier-1 capital affects profitability such as the research by Berger (1995), Rime (2001), Iannotta et al (2007) as well as Naceur and Omran (2011), who revealed that capital was positively related to bank profitability. While Shirreff (2004) and Žuk-Butkuvienė et al (2014) in their respective research found evidence that Tier-1 capital had a significant effect on the financial performance of banks.…”

“…Research conducted by Kurniawan et al (2014) as well as Ayaydin and Karakaya (2014) discovered that profitability had a positive effect on Tier-1 capital. While research conducted by Shirreff (2004) and Žuk-Butkuvienė et al (2014) found evidence that Tier-1 capital had a significant effect on the financial performance of banks. Tier-1 capital to risk management also found evidence by Suhaiza (2014) and Kamel and Elkhatib (2013).…”

“…Commercial Bank is a very important banking institution because it involves huge capital and financial rotation and strategic in encouraging economic growth and development in Indonesia. According to Žuk-Butkuvienė et al (2014), there is a correlation between the quality of capital adequacy and the impact of liquidity risk management on the banking industry influenced by quality control and asset harmonization of bank liabilities. Therefore, various factors and risks to the financial performance of Commercial Banks need to be managed well.…”

“…The performance of those banks depends heavily on various aspects such as capital as suggested in Žuk-Butkuvienė et al (2014), the level of profitability as stated by Naceur and Goied (2012) that possible creation of a value-added affects profitability and the risk factor of banks. The result generated by these three aspects is the result of risk management in banking.…”