Problems of imbalanced liquidity in Latvian commercial banks and possible solutions

Abstract

At present many commercial banks in Latvia face the problem of imbalanced liquidity caused by the mismatch between the terms of borrowing and lending. Thus, during the last 5 years, a rapid growth of long-term lending was not sufficiently covered by long-term resources. Many banks were forced to transform significant amounts of short-term resources into long-term assets running the risk of imbalanced liquidity. In spite of the fact that the implementation of the government‟s anti-crisis programme will undoubtedly affect the banking sector and will lead to a gradual slowing down of lending growth rates, the problem of finding long-term resources will remain high on the banks‟ agenda. In the authors‟ opinion, an important role in attracting long-term bank resources should be played by the issue of securities: bonds, mortgage bonds, etc. as well as by the creation of subordinated liabilities. The present article is devoted to the analysis of the level of equilibrium of bank assets and liabilities by terms and amounts, to the identification of the existing problems in imbalanced liquidity risk management, and to the search for the optimal solution to these problems. The authors also reveal an interconnection between the imbalanced liquidity risk and other risks of a commercial bank (credit, interest rate, market, reputation risks, etc.). They identify the sources of the imbalanced liquidity risk, characterize the impact of each risk source and propose methods for controlling the risk.