Relations Of The Economic Cycle And Banks' Liquidity Risk

Macroeconomic factors and the corresponding bank liquidity risk management in micro-level affect the bank liquidity risk. Micro-level is basically determined by the macro-level. Customers have negative expectations of overall economic situation in economic recession, and are expected to generate run behavior. Banks face the loss of liability because of the run behavior. At this time the liquidation of bank assets can't be guaranteed too. Coupled with manager's risk preference, the banks suffer a high liquidity risk. Customers have good expectations of overall economic situation when the economy is prosperous. And the bank assets and liabilities are in a virtuous circle. In short, many factors constitute low liquidity risk of banks in economic boom.This paper quantifies the bank liquidity risk and China's economic cycle, and examines their relationship. Our empirical analysis essentially confirms the theoretical reasoning, and we get some useful conclusions. Bank liquidity risk has limited capacity to deal with economic change in short-term. Although bank liquidity risk can adjust to the original stability state in long-term, but delay adjustment is too long. Economic cycle's reaction to bank liquidity shocks shows inertia and conduction delay characteristics in short-term, continuing volatility in medium-term, and returns to its own development path in long-term. Real credit growth, the banking institutions (excluding the People's Bank) real external debt growth rate and inter-bank lending interest rate are the necessary elements that affect the bank liquidity risk. These policy factors can ease the shocks of economic cycle to bank liquidity risk in short-term. The medium-term effect of policies makes liquidity risk down to a lower lever, and it eventually pull the bank liquidity risk back to the steady state for six months ahead of schedule. Although policy factors can amplify the positive impact of liquidity risk, they make the economic cycle more frequency fluctuations and deeper down. Therefore, implementation of the policies should be more carefully.