The Analysis Of The Influence Of Sovereign Debt Crisis On Euro Area Banks’ Liquidity

At the end of2009, the Greece sovereign debt crisis took place, and then quickly spread to Ireland, Spain, now spread to Italy. With the spreading and deepening of the sovereign debt crisis, the vulnerability of euro area banks become more and more obvious. After the downgrade of the sovereign state, the liquidity situation of the banks in euro-zone countries, especially in those countries, which experienced sovereign credit downgrade, become tenser and tenser. The France Dexia bank’s bankruptcy was caused largely by the European sovereign debt crisis, which makes the liquidity situation of the bank difficult. This case sounded the warning bell for the majority of the banking sector in Europe. Presently under the sovereign debt crisis, the euro zone banks’ liquidity has arisen more concern and attention of the European monetary authorities. In2011, EU Finance Ministers meeting specially emphasized on the three core points of the European banking sector rescue, including improving the bank’s Tier1capital adequacy, requiring sovereign debt holders who hold a large amount of government bounds from those countries which are experiencing sovereign crisis, to prepare more buffer capital and doing the best to provide funds for the banks to match their needs scale. The ultimate purpose of these three core falls to enrich the bank’s liquidity, improve banks’ resistance of liquidity risk.The bank’s liquidity is a kind of ability to rising funds at reasonable cost to timely meet the demand for cash payment. Liquidity, as one of the three major principles of the banking operation, to some extent, is to protect the bank. Bank itself also needs liquidity, because of the bank’s daily operations, investment activities and debt repayment, all of which needs liquidity as a support. The bank’s liquidity, according to many domestic and foreign literatures, is divided into two aspects, funding liquidity and market liquidity, namely the ability of bank to rising funds at the reasonable cost and bank "s capacity of obtaining cash through selling its asset without causing significant loss of value of the assets respectively. Therefore, the bank’s liquidity risk can be divided into financing liquidity risk and market liquidity risk. The features of liquidity risk, infectiousness and relevance, can help explain the occurrence and spread of banks’liquidity risk under the European sovereign debt crisis. This paper will focus on bank’s funding liquidity risk.This paper adopts methods of theoretical deduction and comparison to analyze the correlation of sovereign debt and the euro area banks, and then conclude the influence of the sovereign debt crisis on the banks of the euro area. The major impacts lie in two aspects, on the one hand, the impact on euro area banks’ asset value and asset quality is observed, on the other hand, the important financing channels for euro area banks have been destroyed On this basis, we test the influence of the increasingly deepening sovereign debt crisis on the banks’ liquidity.In the validation section, the fact that European sovereign debt crises deepen the liquidity crisis of the euro-zone banks was verified by the method of the historical context simulation, one method of stress testing. The results of the validation can almost confirm the previous inference. Therefore, based on the results of the theoretical and empirical analysis, we came up with the approach of the sovereign debt crisis put influence on the liquidity situation of the banks in euro area. Besides that, this paper also reviewed EU’s existing rescue plan for the European economy and the euro zone banks, aims to provoke more profound thinking on the euro-zone banks liquidity assistance through the awareness of existing programs. The structure of this paper is organized as follows:The first chapter is the Introduction part. Firstly, proposed the background of this study, and described the theoretical and practical significance of the writing of this article. Secondly, presented the idea and the structure of the study. Finally, introduced the research methods used in this article.The second chapter is the literature review section. We will give the basic concepts of liquidity and liquidity risk mainly from the bank point of view, and summarize the Bank’s liquidity sources and causes of the bank’s liquidity risk. On this basis, sum up the banks’ liquidity supply and demand in the euro area and try to explain the impact of crisis on the liquidity situation of banks in euro area. In the third part of this chapter, the basic methods of stress testing and its general steps will be introduced, because stress testing is one of today’s most important method of commercial banks’liquidity management.The third chapter is to describe the macro-economic status of euro-zone and the euro area banking structure and banking sector’s status, as well as analyze the impact of sovereign debt crisis on banks’liquidity with inductive method. There are three tasks in this part. Firstly, to describe and analyze the development and current situation of the economy in euro area, and also to analyze the banking structure and status of development of banking sector in euro area, showing the changing business environment of the euro area banks before and after the sovereign debt crisis,. Secondly, to analyze the correlation of sovereign debt and euro area banks with inductive method. Thirdly, to analyze the influence of sovereign debt crisis on banks’liquidity.Chapter four includes the validation analysis on the impact of sovereign debt crisis on euro area banks liquidity and the inference of the influence approach of sovereign debt crisis on euro area banks’ liquidity.Chapter five is for the main conclusions and the review of existing policies.In this paper, the innovative places mainly in the following areas: Firstly, based on the correlation of sovereign debt and euro-zone banks,we try to adopt the latest data to analyze the impact of sovereign debt crisis on the banks of the euro area.Secondly, this article uses a historical simulation to test the changes of banks’ liquidity from sovereign debt crisis happen and deepen.Thirdly, based on the theoretical and practical validation, introduced the way, in which the sovereign debt crisis has influence on banks’liquidity. And come up with a relatively comprehensive framework of the impact of path.However, there are still many inadequacies, mainly concentrated in the following three aspects:Firstly, due to the limitations of the data sources. During scenario simulation analysis, this article can only get the bank’s quarterly data and annual data, instead of monthly data. These data is not so enough to analyze this issue.Secondly, the model.of Scenario simulation testing is not adequate enough. due to the selection of scenario only based on one of the three major rating agencies--Fitch analysis, in fact, during the same period, two other rating agencies also took many downgrade actions for country and banks. Their actions may also cause liquidity changes for these banks. However, this analysis does not take this in account. Secondly, the deepening of the sovereign debt crisis in other countries within the euro area also may impact on these two banks’ liquidity, but this article only considered the its sovereign debt crisis to deepen the impact on banks’ liquidity; Thirdly, the two selected banks in this article had suffered from liquidity difficulties before sovereign debt crisis took place,. Therefore there is a certain amount of interference on the analysis results. Fourthly, banks of Portugal and Portugal have received rescue funds from the EU and the ECB liquidity injection, but this factor has been deducted in this analysis, so there are some interference.Thirdly, the conclusion is not comprehensive enough. First of all, this article mainly focuses on the funding liquidity of euro-zone banks. But there are interconnection of the two aspects of liquidity risk, bank financing, liquidity risk and market liquidity risk can impact on each other mutually, while the analysis of this article only focus on the euro area banks funding liquidity, not includes market liquidity risk, so the results of the analysis is not comprehensive enough.