LIQUIDITY REGULATION OF BANKS IN THE CONTEXT OF FINANCIAL CYCLES

Abstract

The urgency and importance of taking into account the cyclical characteristics of the functioning of the economic and banking system in the process of liquidity regulation of banks is proved. The concept of cyclicity is defined, which means a smooth transition from one phase of the cycle to another based on market conditions and instruments. Three main types of cycles in the current conditions of development of the world market are revealed, such as economic, credit and financial cycles, their essence, main differences and interrelation are highlighted. It is mentioned that financial cycles are «youngest» compared with other types of them. Because financial cycles are often interpreted as indicators of financial imbalance, their relationship with the systemic risk of the banking sector has been followed. It is noted in the presence of systemic risk both in the phase of rise of the financial cycle (accumulation of risk), and at the stage of its decline (materialization of risk). The basic rule for constructing a liquidity regulation strategy for banks depending on the phases of the financial cycle is formulated: accumulation of liquidity at the stage of rise and its optimal use in the phase of recession. In the issue of liquidity management strategy, the main focus should be relocated from pro-cyclical mechanisms to countercyclical instruments that would allow to withstand systemic crisis phenomena. Countercyclical regulation should ensure the preparation of the financial system for future shocks in order to maximize their effective overcoming. The important role of regulatory authorities in the process of constructing the correct strategy of regulation and introduction of the correct levers and instruments of monetary policy is emphasized. In addition, systemically important banking institutions require more control, because it’s bankruptcy will cause irreparable damage to the normal functioning of the whole system. The analysis of indicators of the Ukrainian banking market was conducted depending on the phase of the financial cycle.

Keywords

• cyclicality
• liquidity regulation of banks
• financial cycles
• systemic risk
• countercyclical regulation
• systemically important institutions