Skip to main content

Averaging practice in stock market and Liquidity problem in Banking

Investors in equity market (secondary) are quite familiar with averaging practice of prices. When a stock of higher cost was already purchased but the prices drop down, then purchasing stocks at lower prices (must be probable to gain some increment in those latest prices) will average the per unit cost and given increment in latest prices but lower than previous prices till make loss over previously purchased stock lesser loss making.
Now, thinking the institutional capacity of banks and financial institutions and production and distribution capacity of national economy, given flood of remittance, there must be a lag in mobilization of funds through banks. Thereby keeping interest rate at lower side till national economy's capacity to produce and distribute gets increased. However, let's imagine a scenario where funds are ever demanded and loans are distributed at higher cost. Deposit rates are increased in the name of liquidity problem or liquidity premium is so high that return from depositing is above equity returns. Given the lack of national economy's capacity to utilize the fund, lower production and import, lower consumption etc. still liquidity problem with continuous remittance flow suggest one probable scenario of averaging out practice that old loans are no more revenue generating and fresh loans will be able to circulate positive profit and average out the profit scenario. Liquidity problem is BS problem and not the PL problem, short sighted management may only think of PL management and ignore the BS management. Given lending freshly for averaging problem from revenue of poor assets of past in a fashion similar to stock price averaging for loss minimization. Given the ability of BFIs to throw poor asset like in stock market (in xyz country and surely not in Nepal) then it would have been easier however BFIs accumulate these problems in their BS and some management may go off the book by retirement or by termination of their performance Contract after averaging profit and distributing fresh profit. 
This averaging practice shows perfect PL however, given poor BS, performing BS works as if BFIs just started to lend and it requires more and more money however, Deposit is of cumulative nature. This gross mismatch of behavior of Asset and Liability side of (I am not talking about term mismatch rather how they behave in reality)BS may cause the liquidity problem. PL is nothing but movement of BS's Assets and poor Asset management will never be solved by averaging of profit. But in long term can cause liquidity problem in XYZ country (of course not in Nepal).







[BS=Balance Sheet or Asset Liability Equity table and PL=Profit & Loss statement or yearly activity table, BFIs=Bank and Financial Instituions]

Comments

Post a Comment

Popular posts from this blog

Sustainable development of Life

 XYZ whatever be the technicalities of a life process, the origin is, as I am convinced at this point of time, nothing but wish of Nature or who create the nature. The sole purpose of life is to consume itself. Consume is really the worst word in this context. Let me say to observe the beauty of itself by itself. Hence, we are designed in such a way with such and such purposes by the ultimate guiding truth which is ever full of knowledge of all kind. It can do anything (proof: various form of lives), it is evolved or it is ordained by truth can be a debate. Base of life is nature or life (especially human) struggle with nature to evolve itself. First one provide possibilities of re-creation of more sophisticated or more adaptable life suitable to the nature at that point of time, second is more egoist approach to life and claim nature as nothing but inert objects which are subject to enjoyment or preservation for enjoyment in future (as now discussed in the name of sustainable deve...
Post a Comment
Read more

Ethics : Dharma of Individual (Yoga Sutra)

 Ethics as virtue-  it is collection of desirable action for sustaining society. [dying for group's belief ] Ethics as utility- it is collection of desirable action for sustaining society and more rudely exchanged in name of utility, often society can buy desirable action for society and tag it with ethics. [dying in poverty is ethical but to save life by robbery is not] Ethics of universal rationality- whatever action that can be universalized is ethical and others are not. collectively it again universalize social needs over individual {I am deficient here....} Ethics of social contract- here even an attempt to hide the social behavior and labeling it as ethics has been withdrawn [collective interest labeled as ethics] In my limited understanding these alternatives, individuality is easily coerced by society. But these definitions are not capable to define anything at all. Many things now called Ethics are borrowed from religion. Mainly non-violence and etc. can be traced di...
Post a Comment
Read more

Dharma Ra Nyaya-1

 In no way I am writing with any certainty about these words or realities or whatever phenomena they are. But with quite a discussion with a learned friend of mine, clarity of thoughts seems to built within. However, from very surface reading and my own biases, Dharma and Nyaya have been same thing for me. Naya here is not a branch of philosophy rather justice in its strict sense.  What is Nyaya? In its day-to-day life, a decision by court of justice is itself justice. One can try to cry over and over yet in short run whatever a reason of court is will be justice. However, in truth, justice is related with what a pure human consciousness guide the human being as a justice is justice. Qualifying consciousness with purity may be a false attempt to define something undefined. Here, purity of reason can do good work. With hope , purity of reason coincide with one true reason by all human being. With a good wish, many have found to place great trust in universal reason or something...
Post a Comment
Read more