What is Counter Cyclical Buffer, Liquidity Coverage ratio and Net Stable Funding Ratio?

Counter cyclical buffer:

Banks, in general, share a same customer segment. The sources of avenues for credit distribution and deposit collection are almost similar in every bank. In a country like Nepal, where majority of the population is concentrated in the cities and branches of banks can be found in every lane in the cities, the competition becomes stronger. The constant fluctuation of interest rates of banks can be justified by this competition over a common customer segment.

The liquidity crunch (situation when the demand of loan is high but number of avenues to fund loan is few) has been major problem in the banking economy. During higher liquidity, banks disperse funds in the form of loans easily. However, during liquidity crunch, banks are selective to provide loans. The nature of banking economy is pro cyclical in the nation. This means that the rise and decline in financing from bank is proportional to growth and decline of economy. In reality, the importance of a bank is significant when the economy is in decline. However, usually, in such periods banks do not involve in aggressive credit dispersion.

Counter cyclical buffer, therefore, aims to allocate a certain amount of fund aside in the boom period in order to use it in the period of crisis. For instance, during the good times, CCCB encourages banks to create buffer of capital by setting a certain fund aside for the bad times. Besides, CCCB also assures banks are not engaged in indiscriminate credit lending during the good times. However, requirement of Counter Cyclical Capital Buffer should be notified by the central bank at least four quarters earlier than the actual crisis in order for the banks to make necessary preparations. In India, RBI (Reserve Bank of India) introduced the policy of counter cyclical buffer in February, 2015. However, the implementation of this policy was postponed a year by Indian government as most of the Indian banks were not ready to handle the burden of CCCB.

The Counter Cyclical Buffer needs to be implemented in the following framework:

If the provided framework is not implemented until Asadh end 2077 then Banks will not be able to provide cash dividend. The capital adequacy ratio should also be 13% above in order to distribute dividend. Previously banks could maintain 11% CAR to distribute dividend.

Liquidity Coverage ratio:

Liquidity Coverage Ratio (LCR) prepares banks for short term resilience at times of severe liquidity stress scenario. The purpose of LCR is to ensure banks maintain an adequate level of High Quality Liquid Assets (HQLA) which can be converted into cash to meet its liquidity needs that can last for a time horizon of 30 calendar days. LCR is calculated by dividing HQLA by Total net cash outflows over the next 30 days. The net cash outflow is calculated by subtracting the total outflows from total inflows under a stressed situation as per BASEL III guidelines. This will strengthen banks’ ability to absorb shock that arises from several financial and economic stresses. After the implementation of LCR, banks need to hold a specified amount Highly liquid assets which will be able to fund the banks’ outflows for 30 days. LCR will act as a cushion against the event of financial crisis.

Net Stable Funding Ratio:

Just as LCR promotes resilience of banks for a shorter period of time, Net Stable Funding Ratio does the same for a longer horizon of time. The purpose of NSFR is to ensure banks have enough incentives to fund daily based activities with a stable source of funding. During good economic times, banks rely on short term investment and sources of funding which is usually trouble for banking operation. So, in order to limit this, NSFR ensures banks maintain stable funding structure. It can be calculated by dividing Total Available Stable Funding by Total Required Stable Funding. Sources of Available Stable funding includes: customer deposits, long-term wholesale funding (from the interbank lending market)and equity.

NRB has implemented BASEL III partially. In the days to come, these features are expected to help banking economy attain a better liquidity position in the baking arena.

 

How to Trade the (Inverse) Cup and Handle Pattern

 Introduction:

The cup and handle pattern is a popular chart pattern in the world of trading, known for its reliability and ease of identification. Despite its effectiveness, many traders remain unaware of its existence, making it a potential advantage for those who learn to spot and utilize it. In this article, we will explore the cup and handle pattern, its characteristics, and how to trade it effectively to gain profitable signals.

 

Understanding the Cup and Handle Pattern:

The cup and handle pattern is a bullish chart formation discovered by William O’Neil in 1988, known for its resemblance to a "U" shape on the chart. It consists of three stages: an initial downtrend, a period of consolidation forming the cup's rounding bottom, and a subsequent rally on the right-hand side of the cup. The breakout from the cup and handle pattern is expected to lead to further price increases, though this is not guaranteed in every case.

 

Spotting the Cup and Handle Pattern:

To identify the cup and handle pattern, observe the "cup" section, which takes the form of a "U" shape on the chart. The consolidation phase in the cup should coincide with low trading volume. The rally following the bottoming process should bring prices back to the same level as the previous peak, forming a straight resistance line connecting both lips of the cup. The subsequent "handle" pattern occurs when prices pull back from the right shoulder of the cup. The handle should be a temporary dip, usually no more than one-third of the cup's height.

 

Factors Influencing the Pattern:

The depth of the cup plays a crucial role in determining the potential profit target. A deeper cup suggests higher expected price increases upon breakout. Additionally, the handle should be shallower than the cup, indicating that buyers regained control before prices declined significantly. The ideal time frame for the formation of the cup and handle pattern is generally 2 to 6 months, with the cup taking longer to form than the handle.

 

Trading the Cup and Handle Pattern:

For long positions, the best entry point is just above the right shoulder of the handle, which represents the breakout point from the cup and handle's resistance line. To avoid false breakouts, it is advisable to look for increased volume before the breakout and set a stop loss just below the resistance level. Once the breakout occurs, the minimum price target can be calculated by measuring the cup's height from its lowest point to the resistance level and adding this distance to the handle's breakout point.

 

Inverse Cup and Handle Pattern:

The inverse cup and handle pattern follows the same logic as the standard pattern but in reverse, making it a bearish chart pattern. It can be useful for timing exit points for long positions or entry points for short positions. The breakout from the support line indicates the beginning of a new downtrend.

 

Cup and Handle as Continuation or Reversal Pattern:

The cup and handle pattern can be either a bullish continuation or a reversal pattern, depending on the direction of the prior trend. In a bullish trend, the cup and handle represent a consolidation phase, and the breakout leads to the continuation of the previous trend. In contrast, in a bearish trend, the pattern can signal a reversal.

 

Success Rate and Considerations:

Although there is no exact success rate for the cup and handle pattern, it is generally considered to be one of the more reliable chart patterns. Factors such as higher volume towards the handle breakout and prevailing bull markets can increase its effectiveness. Traders should be aware of variations and use the pattern as a framework for disciplined trading, understanding that precise timing is challenging in technical analysis.

Improving the Discounted Earnings Growth Model for Calculating Intrinsic Value

Determining a company's stock's intrinsic value is a crucial step in the decision-making process for investors and financial analysts. The Discounted Earnings Growth Model, often called Discounted Future Earnings, is one method for calculating this intrinsic value. The profits worth of a company and its expected terminal value at a later time can be predicted in an organized manner with the help of this model. In this context, terminal value refers to all of the anticipated future cash flows that will reflect predicted returns after the initial projection period, which might be difficult to forecast.

The fundamental idea behind this model is to take future earnings of a company, apply a suitable discount rate to bring those earnings down to their present value, and then add the present value of the predicted terminal value to the sum of these discounted future earnings. The intrinsic worth of the company is provided by the computation's outcome.