Liquidity Risk Management in Banks is they case study that is solved by comparing the liquidity situation between HSBAC UK and JD Sports Fashion.
When companies are unable to satisfy the financial obligations on time or if business are only able to satisfy these obligations at a high cost, they have a liquidity risk. When it comes to managing liquidity risk, the goal is to ensure that the company can always meet its payment obligations while also managing funding risks within its risk aversion. The framework takes into account both on- and off-balance-sheet liquidity risk factors. In other words, liquidity risk refers to the danger of incurring losses because of a decline in our financial position, making it more difficult to raise the money we need or forcing us to borrow money at much higher interest rates than usual.
It is essential for institutions to maintain adequate amounts of liquidity so that they may take advantage of any potential investment opportunities. Liquidity risk management enables institutions to stay ahead of the competition as funding sources become increasingly variable and expensive. To effectively manage and control liquidity risk, it is necessary to deploy both a sophisticated Liquidity Risk Management System and an adequate Liquidity Risk Management and Control Framework. Unlike the banking sector, corporate liquidity will not be regulated to the same extent. When it comes to liquidity risk management, banks must follow by external requirements, but any company that sets up a structure for governance of liquidity will have an internal “regulatory” effect.
Liquidity risk refers to the risk of the firm when the firm is not able to converts its assets into cash when it is highly required for the company. It means this risks is occurred when the firm is unable to pay its debt obligations. In that case, tit is highly recommended to measure the liquidity risk of the firm and its role is huge. The role of liquidity risk analysis is expressive as it helps to show the cash deficiencies in the firm or the liquidity crisis position in the firm. It helps the firm to find out the sources of fund that are not providing good responses to manage the cash fund or the sources of those assets that are not giving proper feedback in response to the conversion of assets into cash in the time of company needs.
Liquidity Risk Management in Banks HSBC UK compare to JD Sports Fashion Plc
In this study HSBC UK bank Plc and JD Sports Fashion Plc are chosen. The reason behind to choose HSBC UK bank Plc is that it is the leading financial intuitions in UK and dealing with cash as well as listed in the stock market, so in analyzing the role of liquidity risk this firm is lucrative. On the other hand, JD Sports Fashion Plc is mainly the firm of sports based retail organization and it is listed in the stock market. So, overall when the firms are listed in the stock market, it is very much required for the investor to know as well as measure the liquidity ratio of the firm as whiter that gives the output regarding the firm that the firm is financially stable or not. Though there are some more competitors of these two firms like Dick’s Sporting goods, BIG5 Sporting Goods, and also Barclays Plc, Citi Group Inc. are the top competitors well, I have chosen to analyze HSBC UK and JD.
Key Sources for the company use for Liquidity in 2018
For HSBC UK Plc the key sources for liquidity are as follows:
Cash Balance at central bank £m 33193, collection for other bank £m 603, financial assets £m 35, derivative assets as £m 66, loans & advance (banks) £m 1263, , loans & advance (customers) £m 174807.
On the other hand, For JD Sports Fashion Plc the key sources for liquidity are as follows:
Property, plant and equipment £m 376.9, Other sources of assets £m 66.5, cash balance £m 347.5, trade receivable £m 146.3 and Inventories £m 478.0.
Other investment options
For HSBC UK Plc the other investment options are as follows:
HSBC World Selection Funds is ready made of venture investments portfolios that plan to give capital development by putting resources into worldwide markets and a wide scope of benefit classes with the component of as choose or select between five portfolios, as each with various dimensions of hazard or risk presentation and also available in sterling, as US dollars or as euro. Moreover, it is with minimum investment of £m 250
HSBC Global Investment Funds is aiming to represent at experienced financial specialists who like to settle on their own speculation choices, or need to put resources into a specific market with the element of HSBC Global Investment Funds spread a wide scope of benefit classes, as venture of investments styles and as land locales. Moreover, it is with minimum investment of £m 250
Share – Dealing is a HBSC Invest-Direct International Account that is an effective method to purchase and sell imparts to the element of where Eligible speculators can exchange on the web or by telephone in UK and USA securities exchanges, in sterling or US dollar. also, it is Important that this administration is situated in the UK so as the portfolios will be liable to UK tax collection. Moreover, it is with minimum investment of 1 share.
In addition to, it has the following investment scenarios of HSBC UK Plc
Capital Expenditure in Fixed Asset as £m 896.95 in 2018 that is decreased and shows the liquidity risk increased.
Capital Expenditure in Other Asset as £B 1.39 in 2018 that is increased and shows liquidity risk is decreased.
Sale of Fixed Asset and Business as £m 3 in 2018 that is decreased and it means asset conversion into cash is strong and less risk.
New purchase Investment as £B 319.08 in 2018 that is increased and it has high liquidity balance.
Maturity Investment as £B 285.79 in 2018 that is decreased and good cash balance available and less risk.
Other sources of investment as £m 152.99 in 2018 that is increased and it has high liquidity balance.
For JD sports Fashion Plc, the other investment options are as follows:
Capital Expenditure in Fixed Asset as £m 173.8 in 2018 that is increased and shows liquidity risk is decreased.
Capital Expenditure in Other Asset as £m 169.3 in 2018 that is increased and shows liquidity risk is decreased.
Net Asset from Acquisition as £m 4.5 in 2018 that is decreased and it has less liquidity balance
Other source of investment as £m 12.8 in 2018 that is increased and it has high liquidity balance
Here, both companies are managing cash flows by the means of operating, financing and investing activities. Of course, cash flows are really important for liquidity because it shows the cash end balance of the firm as it is in surplus of deficit position to take decision from the investor point of view to select the firm or not.
So, finally company normally evaluate liquidity positions by calculating the liquidity ratio that show the ability of the firm to pay off its debt obligations strongly or not. From my point of view liquidity ratio is the best and globally used format to measure the liquidity risk.
References – Liquidity Risk Management in Banks
HSBC. (2018). HSBC Bank UK Plc Annual Report. London: HSBC.
JD. (2018). JD Fashion Sports Plc Annual Report. London: JD.
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