Saudi Arabia has demonstrated a “reasonable” level of liquidity, with a loan-to-deposit ratio of 88 percent as of the end of December 2008, says Khalil Hanware today in the Arab News newspaper (1)
The virtue of “matching maturities” – matching one year loans to one year deposits and so on
– is a lesson taught in basic college finance classes.
And it is simple common sense.
But unfortunately, Saudi banks don’t do business that way.
But a bank with mismatched maturities is however bank an illiquid bank. (2)
Like all the planet’s banks, Saudi banks don’t match maturities and are thus illiquid,
i.e.,
they should be liquidated because they are fraudulent.
Ivo Cerckel
honestmoney@maktoob.com
http://twitter.com/ivocerckel/
NOTES
(1)
Deposits with Saudi banks rise to SR916 billion
Khalil Hanware | Arab News
Sunday 9 August 2009 (18 Sha`ban 1430)
JEDDAH
http://www.arabnews.com/?page=6§ion=0&article=125293&d=9&m=8&y=2009
(2)
Harry Browne, “The Economic Time Bomb”, New York, St Martin’s Press, 1989, p. 10
Many banks have a smaller net worth than you do.
If they tried to pay of all their depositors, they would have little money left/
Browne, pp. 49 – 50
A bank earns its living by taking money in from depositors, and lending the money to its customers
or investing it.
The bank’s gross profit is the difference between the interest it earns and the interest it
pays.
A bank’s assets are its cash holdings, its outstanding loans (the money owed to it by borrowers
and its investments.)
its main liabilities are its outstanding deposits - money it owes to its depositors.
Because banks generally can earn a greater return on loans than on investment,
it will lend out as much of its money as it dares.
a bank may tie up nearly all of its assets in loans – if it’s confident that only a few of its
depositors will want to withdraw their money on any day or in any short period.
A bank fails when it doesn’t have enough cash available to pay the depositors who want to
withdraw their money – even if the bank’s assets are worth enough money to pay everyone
eventually
Browne, p. 50
§ MATCHING MATURITIES
for a bank, LIQUIDITY is the key
the availability of enough cash (or assets that can be converted to cash immediately) to honour
all withdrawal requests
To be liquid, a bank doesn’t need to have all its money in the vault.
But it does need to arrange its loans and investments to allow for the promises that the bank has
made to its depositors.
Browne, p. 51
§ IN PRACTICE
The virtue of “matching maturities” – matching one year loans to one year deposits and so on
– is a lesson taught in basic college finance classes.
And it is simple common sense.
But unfortunately, American banks don’t do business that way
- this is done in order to increase banks’ profit margins
But a bank with MISMATCHED MATURITIES is an ILLIQUID bank.