Strategies for Managing Liquidity Risks in UK Banking Sector: A Study on Barclays Plc

This study evaluates the strategies undertaken by the UK banking sector, with a focus on Barclays Plc, for managing risks associated with liquidity aspects. It examines the significance of these strategies in managing liquidity risks and their impact on the financial performance of Barclays Plc. The study also identifies effective ways to manage the negative impact of liquidity risks and improve financial performance.

To evaluate strategies undertaken by the
UK banking sector for managing risks
associated with liquidity aspects: A study
on Barclays Plc
1

Contents
Contents...........................................................................................................................................2
1. INTRODUCTION.......................................................................................................................3
1.2 Problem statement.................................................................................................................3
1.3 Conceptual framework..........................................................................................................3
1.4 Purpose of the research.........................................................................................................3
1.5 Research questions................................................................................................................4
1.6 Structure of the research........................................................................................................4
LITERATURE REVIEW................................................................................................................5
REFERENCES..............................................................................................................................13
online:............................................................................................................................................13
2

1. INTRODUCTION
1.1 Background
Liquidity introduces to how assets can be converted into cash in easier way. It is an
amount of money that is available for spending and investment. It includes of notes, cash, bonds,
treasury bills and any other assets, which can be sold speedily. There are certain factors that
directly affects liquidity position of an organisation. These are obsolete inventory, bad debt, tight
credit i.e. expensive or less trade credit.
Barclays Plc is a multinational investment bank that provides financial services to the
customers. Barclays Plc was founded in 17 November 1690 by the Nigel Higgins and
headquartered in London, England, UK. Barclays Plc deals in different types of products which
are retail banking, commercial banking, wealth management, private banking, investment
banking, wholesale banking etc. Main purpose of Barclays Plc in providing financial services to
the customers with purpose of attaining long term goals and objectives.
Main rationale regarding the selection of current topic is to determine strategies undertaken
by the UK banking sector for managing risks associated with liquidity aspects. This is a main
reason regarding the selection of current topic. Along with this, current investigation is important
at personal as well as professional level. At personal level, this research helps me by improving
my research skills such as decision making, literature review, data collection, time management
and many other. These skills helped me in completion of full project within given time period. At
professional level, present study supported me in getting of opportunity within banking sector.
Therefore, current study is important for me at personal and professional level.
1.2 Problem statement
1.3 Conceptual framework
1.4 Purpose of the research
Research aim
Main aim of this research is “To evaluate strategies undertaken by the UK banking sector for
managing risks associated with liquidity aspects”: A study on Barclays Plc
Research objectives
 To identify the strategies used by banking sector of United Kingdom.
3

 To investigate the significance of those strategies in management of risk associated with
liquidity aspects.
 To determine the impact of risks associated with liquidity aspects on financial
performance of Barclays Plc.
 To identify the ways for managing negative impact of risks associated with liquidity
aspects in improving financial performance of Barclays Plc.
1.5 Research questions
 What are the strategies used by banking sector of United Kingdom?
 What are the significance of those strategies in management of risk associated with
liquidity aspects?
 What are the impacts of risks associated with liquidity aspects on financial performance
of Barclays Plc.?
 What are the effective ways for managing negative impact of risks associated with
liquidity aspects in improving financial performance of Barclays Plc.?
1.6 Structure of the research
This is an essential part of the dissertation because it facilitates reader in determination of
chapters that will be required for completing current project systematically. There are different
chapters that will be needed for completing current dissertation in systematic manner. These will
be explained as below:
Chapter 1: Introduction: In order to complete this chapter, there are various sub-activities,
which are problem statement, conceptual framework, purpose of research, research questions etc.
These are main activities that were helped in completion of such chapter systematically.
Chapter 2: Literature review: This chapter includes secondary information about the topic.
There are various sources used for collecting secondary information such as books, articles,
websites etc. This section also covers financial crisis, bank performance and CAMELS rating
model.
Chapter 3: Research meth
ods: This is significant chapter because it will help in gathering of accurate information through
specific method. There are different methods that will be included in this chapter such as capital
adequacy,
4

Chapter 4: Findings and discussion
Chapter 5: Conclusion:
5

LITERATURE REVIEW
A literature review is a survey which helps in acquiring knowledge on specific topic with
the help of already available information. It provides an overview of the current information
where with the help of various relevant theories, methods, etc. The main objective of literature
review is to identify the gaps in the current information.
What are the strategies used by banking sector of United Kingdom?
According to Jim Marous, with the increase in the level of competition and changing
behaviour of customers, the banking industry is facing challenges and need to focus on important
exercises. In addition to this, the banks also get higher growth and success at marketplace. Here
are few strategies which are adopted by banking companies in order to increase its sales and
profit margins.
 Focus on improving digital customer experience- Main asset of the banking sector is its
customers hence they are focusing on improving customer experience. As customer’s
decisions changes frequently on the bases of the ease and facilities they are getting from
the service provider. Furthermore, with the increasing level of competition there is rise in
new roles and titles in the industry as their main motive is to acquire large number of
customers. It help company to strengthen its market presence and grab high market share
which in turn leads to attainment of objectives timely and effectively. With the help of
digital tool, the banking companies have provided many online services that is customers
can take help of banks from anywhere which means no physical presence is necessary.
This decline the level of cost occurred to the company that impact positively on its
productivity as well as profitability level. They are focusing on mobile engagement and
also focusing on applying various resources with the motive to improve customer
experience. The companies dealing in banking sector need to evaluate resources in order
to determine the steps which are essential to measure success. The banking mobile
application provide services where customers can check their bank balance, make online
transactions and also can deposit money in their accounts. This saves the time and money
of customers which is one the reason of increase in number of people using online
applications.
 Data analytics capabilities- Customer insight and data analytics is effective tools which is
helping retail banking in overcoming the differences a taking steps according to trends.
6

Banking industry is forming effective strategies in order to improve multichannel
delivery and explore use of APIs, etc. The companies having data find difficulty in
analysing what impact will it have on the performance of company. The problems faced
by companies are IT complexity where due to some technical issues there is deal in work
process. Secondly due to lack of coordination the chances of mistake are more which lead
to deal in the completion of task. The risk in banking sector is high in following behind in
leveraging consumer insights as customer expectation are increasing frequently. These
expectations are meet by non-financial competitors in the marketplace.
 Reduction in operating costs- As banking sector is charging less interest from customers
due to which more time and efforts are put by financial organisations in order to reduce
the costs at all possible areas. With the regular examination of digital banking technology
the management need to put less efforts and also helping in reducing the operation cost.
In addition to this, banks are also able to improve its customer service that leads to
increase in customer base level and profitability level as well.
 Focus on customer outreach- It is important for the company to emphasis on reaching
large number of customers as it help in raising customer base level and growth at
marketplace. In addition to this, it also help organisation to maintain its brand image and
sustain at marketplace for longer time period. With the use of digital and social media
marketing the primary focus of the banks is to connect with the customers and identify
their needs and preferences. As the banks are using social media for marketing, customer
outreach is also an important factor for the effective implementation of marketing
strategy. The banks can strategically outreach the customers through offering courses
related to online security, mobile banking and financial literacy. The marketing strategy
for customer outreach should focus on maintaining relationships with their customers.
 Combine personalization with the data: The marketing strategy of the banks should use
the data which will help the bank to provide better and personalized products and
services. The banks can provide automation algorithm through which the bank can
recommend the products and services based on the previous usage of the customers.
 Customer experience should be the priority: The marketing strategy of banks must create
a positive experience on their customers and the bank must deliver quality services to
their customers. The marketing strategies of the bank should focus on the techniques of
7

interacting with the customers to have an effective two-way communication which can
help to understand the ideas of the clients.
 Provide loyalty programs: Loyalty programs are the marketing strategies that are adopted
by the banks through which the customers are rewarded when they are using the services
that are provided by the bank.
What are the significance of those strategies in management of risk associated with
liquidity aspects?
According to Michael Deely, the liquidity risk in context of banking sector is raised from
long term assets. Liquidity is basically the ability of bank to clear its regular financial obligations
and would not face suffer from undesirable losses. As the companies belonging to banking sector
are converting their short term deposits into long term loans so high risk is involved in it. Hence,
it is important for them to take measures so that they would able to handle the situations in future
in effective and efficient manner. The significance of forming strategies in managing risk are as
follow-
 Identification of liquidity risks earlier- The liquidity management process within the
banking company should be forward looking that is helpful in meeting future
uncertainties. The finance department of companies should have effective team which
has ability to conduct risk analysis on extreme hypothetical situations and able to
maintain liquid assets in effective manner.
 Monitor and control liquidity regularly- Once bank able to identify and forecast its
liquidity risk they have to actively monitor and control the funds and the risk associated
with it. On the bases of the size and scope of the bank they should formulate or make
changes in its legal entities, business lines and international currencies.
 Conduct Scheduled stress tests- As uncertainties or emergency may take place at any
point of time the management of bank need to conduct regular financial stress tests in
order to anticipate different potential liquidity shortfalls.
 Create a contingency plan- The banking industry should build contingency plan in order
to effectively handle the different situations. With the help of effective new policies and
development of formal contingency funding plan they would able to overcome from
liquidity problem in various emergency situations.
8

The institute need to effectively manage the liquidity risk and ALM system in order to carry its
operation and activities properly. Establishment of analytic framework with the motive to
calculate the risk and able to manage market events. It helps in minimize the impact of market
shocks and should look for better growth opportunities.
Mainly due to poor liquidity management the banks face difficulties and problems as they
are not able to follow all the principles related to liquidity management. In order to establish
sound management, the banks must focus robust liquidity risk management in order to maintain
sufficient liquidity and to withstand a range of stress events. For liquidity risk management the
bank must take following measures which are -
 The bank must clearly outline the risk tolerance so that the management must know its
limits and accordingly build effective business strategy.
 Senior management with the bank must develop strategy, policies and practices according
to the risk and should also ensure that bank must maintain sufficient liquidity as it help in
dealing with the issues which arise in the future at any time.
Importance of strategy in management of risk- As with the increase in level of technology and
increasing needs of customers the digital customer experience is playing significant role in
growth of banking industry. As customers are able to quickly excess the banking services with
the help of their smart phones and need not to visit bank for small work. It has helped the
banking employees as they would able to utilize their time in other activities. Furthermore, it has
helped in reducing the operation costs with the use of various digital tools the process has
become easy and the changes of mistake are less. Moreover, it also assist bank employee to
improve its skills that is significant for both professional as well as personal life in this technical
environment. A bank should actively manage its intraday liquidity positions and risks to meet
payment and settlement obligations on a timely basis under both normal and stressed conditions
and thus contribute to the smooth functioning of payment and settlement systems.
What are the impacts of risks associated with liquidity aspects on financial performance of
Barclays Plc.?
Financial performance is basically describing as process in which performance level of
company is determined for specific period of time with the motive to acquire information on
overall profits and losses of company. Analysis of financial statement in Barclay Plc involves
interest to lenders, security analysts, etc. The trade creditors of the institute are interested in
9

knowing the ability to meet their claims. The long term creditors are paying focus on firm's
solvency and its profit level. In addition to this, they also emphasis on the level of liquidity that
bank is associated with. Hence financial ratios are the most effective tools which are used by
Barclay Plc in measuring and evaluating its financial performance. As the interest earned by
company is the primary source of revenue, a number of factors are impacting the interest margins
of company. The loan to assets ratio is been used by company as a specific metric which is
helping investors in having complete analysis of operations of bank. The return on assets ratio is
frequently used by Barclay plc as cash flow analysis is difficult for them to accurately construct.
The risk of a financial asset is determined by the financial return of an asset or in other words the
higher return involves higher risk and lower return involves lower risk. Liquidity refers to the
capacity of an organisation to increase the asset meet the cash obligations. Liquidity management
states organisational ability to meet liabilities and other obligations which reduces the future risk
uncertainty. Liquidity risk states the financial structure of any business. There are two types of
liquidity risk, they are asset liquidity risk and funding liquidity risk. Asset liquidity risk refers to
probability to the risk of loss resulting when the business is unable meet the transaction. Funding
Liquidity risk is the probability of loss when the business is unable to meet the cash transactions.
Liquidity risk management is termed when the banks are not able to meet the obligations to
depositors arising due the expected losses. It affects the financial performance of the banks as it
limits the cash flow. It holds all the transactions in losses, spoils the goodwill in the market,
insolvency risk. When banks inability to maintain the liquidity is resulted from the banks unable
to find the liquid sources, liquidity pressure. These uncertainness occurs mostly when depositors
collectively withdraw money from bank. In Barclays Plc. formulates different financial policies
in order to meet with these uncertain losses. It maintains the liquidity ratio of cash to deal with
these uncertain events. These ratios are being determined by the Board of directors of Barclays
Plc. High liquidity ratios determines the ability of the bank to meet the financial obligations.
While preparing balance sheet adequate cash balances is maintained for meeting contingency
liability. Maintain these reserves helps to maintain financial stability and helps to meet future
obligations.
What are the effective ways for managing negative impact of risks associated with liquidity
aspects in improving financial performance of Barclays Plc.?
10

According to Michael Deely, (2019), Liquidity is the ability of a bank to fulfil overall
regular financial obligations without suffering undesirable losses. In addition to this, Bank
transform short-term deposit that is savings account, checking & other assets into the long-term
loans. Banks within the procedure of financial intermediation are confronted with different forms
of non-financial and financial risks such as equity price, foreign exchange rate, credit, equity
price, interest rate and many more. All these risk are interdependent & impact one area of risk
from the range of risk categories. Therefore, it is important for the top authorities of bank to
attach considerable importance to enhance the capability to measure, identify, control as well as
monitor the overall level of risks undertaken. It is analysed that banks are more assailable to
liquidity risk in comparison to other financial institutions. Almost every transaction has impact
on the liquidity of bank so it is important to make use of liquidity risk management strategy
which ensure cash flow is enough & prepared for the external market changes as well. It is
determine that the level of liquidity mainly depends on the relationship among organisation cash
asset & the liabilities awaiting payments that can be fulfil rapidly. It is stated that if more
earnings is needed high and high investment is to be made that might result into low level of
liquidity. Liquidity management is getting more complex in comparison to last years and so it is
important for an organisation to make use of principles of robust liquidity risk management: The
principles is given below:
Identification of liquidity risk early: It is stated that liquidity deficit in an institution
has system wide repercussions so it is important for banks to be prepared prior to the shortfall
arise. It means that bank requires to have rigorous procedure in order to identify and measure
liquidity risk in an effective manner. The liquidity management procedure consist of a forward
looking framework to the project future cash flow from liabilities, assets as well as other items
include in the balance sheet. Moreover, it also involve the ability to implement risk analysis on
hypothetical as well as extreme situations. It also consist of the maintenance of liquid assets in
order to serve as a cushion at the time of possible cushion. Furthermore, identification of risk at
the right time will help respective bank to develop effective strategies and deal with them in
every situations as well.
Control and monitor liquidity regularly: Once an organisation analysed & forecasted
the liquidity risk then it is significant to control as well as monitor funding requirements and risk
exposures associated to it. It is analysed that the monitoring requirements to account for business
11

lines, legal entities and international currencies is depend on the scope and size of bank. In
addition to this, it is important for a bank to account the banking compliances regulations which
may limit the conversion of liquidity asserts. There are various factors that is required to be
considered by business entity that monitoring and control tools consist of metrics as well as
indicators such as business specific liquidity indicators, global liquidity indicators, all necessary
regulatory ratios, advanced cash flow forecasting and so on. All this assist Barclays bank to
effectively monitor as well as control liquidity on regular basis in a proper manner.
Conduct scheduled stress tests: It is important for banks to conduct financial stress test
regularly in order to anticipate various potential liquidity shortage. This test consist of long-term
as well as short-term scenarios which analyse the sources of liquidity strain & also ensures
overall exposures align with the developed liquidate risk tolerance. It is important for a company
while conduct scheduled stress to include market wide stress scenarios of individual and
combined variables, institution specific strains and many more. This assist in proper
implementation of test that results positively for the company.
Develop a contingency plan: It take place after the results of stress test is developed and
herein the organisation adjust liquidity risk management strategies. After this, the company make
use of new positions and policies in order to develop a formal contingency funding plan which
states the plan made in order to overcome with the liquidity shortfalls in different emergency
situations. An effective contingency plan is one that outlines the overall policies for managing
different stress environments, clarify escalation procedures, delegate responsibility and many
more. It is analysed that in the present time, financial markets is complex and changing due to
environment. Along with this, liquidity risk management is getting difficult in comparison to last
years. Moreover, this plan help in dealing with any form of situations which arise at any period
of time.
By the assistance of these four principles, a bank navigates with high confidence and
security for the future. In addition to this, it also help bank to minimise the level of risk
associated to the liquidity aspect in order to enhance performance effectively. Moreover, a bank
should develop liquidity risk management framework which is integrated into the bank-wide risk
management procedure. The main objective here is to ensure with high level of confidence
which the organisation is in a position to address daily and withstand liquidity obligations which
affecting the both secured and unsecured funding. Furthermore, the objective of liquidity
12

regulation and supervision is to decline the severity and frequency of banks liquidity issues. It is
determining that the strong capital positions minimise the likelihood of liquidity pressure and
solve the liquidity problem of banks.
CAMELS rating model
CAMELS is recognized international credit rating system which is used by bank regulatory
authority to evaluate financial institutions on the basis of six variables specified by acronym.
Supervisory authorities allocate ratings on scale to banks. A score of 1 is deemed the highest, and
for each aspect, rating of 5 is deemed the worst. Banks with average score of lesser than two are
regarded to be greater institutions. Banking institutions with scores higher than 3 are deemed to
be entities that are lesser than satisfactory. Acronyms CAMELS stands for following factors used
to assess bank institutions by examiners:
Capital Adequacy
Examiners assess the capital adequacy of organizations by capital trend evaluation.
Examiners check whether institutions conform with the requirements for risk-based net worth
criteria. In order to obtain a higher capital adequacy rating, organizations must also conform with
the rules and procedures on interests and dividends. Other variables involved in assessment and
assessment of institution's capital adequacy include its development plans, economic situation,
risk-control capability, and lending as well as investment levels. Capital Adequacy
Ratio is computation of the accessible capital of bank expressed as proportion of risk-weighted
credit exposure of bank. Capital adequacy proportion, also referred to capital-to-risk weighted
assets ratio, is being used to safeguard depositors and facilitate stability and effectiveness of
financial structures around world.
Capital Tier-1: Tier-1 capital includes equity capital, capital resources, intangible assets
including reserves of revenue. Tier-1 capital often used to cover losses and therefore does not
require functions to be ceased by bank. Tier-1 capital is capital that is indefinitely and readily
accessible without being needed to stop working to cushion loses incurred by bank.
Unaudited RE, unaudited assets and total loss reserves are composed of Tier-2 capital. Such
capital bears losses in event of a corporation winding-up or in liquidating. In the event that bank
winds-up, Tier-2 capital is one which cushions losses, but it offers depositors as well as creditors
with a lower level of security. When bank loses all Tier-1 reserves, it's being used to cover
losses.
13

To measure bank's capital adequacy ratio, two capital rates are applied together and
separated by the risk-weighted assets. Risk-weighted assets calculated by looking at loans of a
bank, calculating risk and then allocating weights. Adjustments are rendered to value of assets
reported on balance sheet of lender when assessing credit exposure. In order to minimize risk of
insolvency, the risk-weighted assets are being used to assess minimum sum of capital which
must be retained by banks as well as other entities. For each form of bank's asset, capital
requirement is focused on the risk assessment.
Asset Quality
Asset quality encompasses quality of institutional loan, representing institution's earnings.
Evaluating asset quality requires assessing investments risk variables that bank may pose and
measuring those variables against capital earnings of the bank. If dealing with real risks, this
illustrates bank's stability. Examiners often analyze how businesses, when compared with bank's
book values of investments, are influenced by fair market values of investments. Finally, asset
quality level is expressed by the performance of investment policies as well as practices
of organization.
Management
The evaluation of management decides whether institution is capable of responding
appropriately to financial pressure This aspect rating represents ability of leadership to figure
out, assess, take care of and monitor risks of daily operations of the organization. It encompasses
the capacity of the management to insure the organization's safe functioning as they conform
with internal and external guidelines that are required and relevant.
Earnings
The ability of bank to generate profits in order to be able to maintain its operations, grow and
stay competitive is a crucial factor in determining its continuing viability. Examiners calculate
this by measuring the bank's profits, development in earnings, sustainability, valuation
allowances, profit margins, overall net-worth level and consistency of the overall assets of bank.
Liquidity
To determine bank's liquidity, investigators aim at interests’ rate risk exposure, accessibility of
assets which can effectively be transformed to cash, reliance on shorter-term volatile financial
capital and the ALM technical competence.
Sensitivity/Size
14

Sensitivity encompasses how organizations may be impacted by real risk exposure. Assessors
measure the exposure of an organization to market risks by tracking management of the credit
concentrations. Throughout this way, investigators are likely to see how entity is impacted by
lending to particular industries.
15

REFERENCES
Books & Journal
online:
Liqudity risk management, 2019, [online], Available through
<https://www.bigskyassociates.com/blog/4-principles-for-more-robust-liquidity-risk-
management>
Liquidity risk, 2020, [online], Available through
<https://www.investopedia.com/articles/trading/11/understanding-liquidity-risk.asp>
16