THE RUSH FOR LIQUIDITY AND ITS IMPLICATIONS FOR CREDIT RISK

For centuries, the currency was the main means of circulation of world wealth, and its creation was created to perform three primary functions:

• Medium of exchange: assuming the function of intermediary between the goods;
• Unit of account: assuming the reference function of the exchanges, that is, it standardises that the goods are expressed in values;
• Value reserve: ensures that purchasing power is maintained over time.

In the midst of the need to ensure that these functions were perpetuated and that their use was regulated, giving fluidity to transactions, Financial Institutions were created, which currently play an important role in the relationship between Savings, Consumption and Investment. According to the classical theory of some economic schools, the generation of wealth in a nation can be measured by the capacity of agents to save resources, and for this relationship between Savers and Investors to have balance, the intertemporal choice between saving or consuming in the present time , must undergo a monetary adjustment, that is, interest rate. Thus, Financial Institutions, through their expertise in aligning the future expectations of savers with the search for investor growth projections, assume a role in financing the market, intermediating a cycle of leveraging the development of an economy:

Source: Own ElaborationIn this scenario, alternatives for allocating capital to certain Investment Projects appear, which are evaluated daily by Financial Institutions in order to seek the highest possible return, reducing the cost and effort of the individual saver in the search for the best return (IRR) and the shortest return period (Payback). The maturity period of the investments is directly related to the Liquidity of the Assets, since projects with longer terms generally have a higher return, but greater risk. The durations of the projects are related to the technological differences employed in the adopted production chains, thus determining their liquidity. Since the liquidity of an Asset is a measure of the speed at which agents are able to convert it into purchasing power (consumption), the fear on the part of individuals not being able to convert as quickly as desired at established prices gives rise to Liquidity Risk. This risk is accentuated by the macroeconomic scenario, since not only is return on investment related to the capacity of local productive activity, but also to the ability of investors to honor their commitments made to savers. In periods of crisis, such as the one that the world is currently experiencing, due to COVID-19, there is a great search for Liquidity, as agents start to have uncertainties about the future profitability of projects. This wave of seeking Liquidity ended up strongly altering the strategies of national Financial Institutions:

Source: Financial StatementsRight now, companies are in an intense search for capital to reinforce their cash flow. Capital needed not only to sustain the momentarily loss-making operation, in view of default and falling revenue, but also to take advantage of strategic opportunities for market domination, such as acquisitions and opening of new business units. The availability of funds under the custody of Financial Institutions in periods of crisis tends to be more abundant, since families, in general, start rationing their consumption in the short term to be sure of the possibility of consumption in the long term, given the uncertainties. Even with greater savings for allocation, Credit Risk is greater, that is, there is an increase in the probability of losses associated with the non-compliance by the borrower or counterparty with their respective financial obligations under the agreed terms. Because they do not see liquidity in many of the projects, especially small and medium-sized companies, these Institutions end up not transferring capital to these agents, who play a fundamental role in supporting the national economy. Companies that are currently seeking capital, mainly intended for Projects, need to prove to Financial Institutions their future cash generation capacity, through an attractive investment thesis and a well-prepared business plan, which proves the viability of the project. ARTICLE WRITTEN BY JACKSON MOL — ASSOCIATE FROM FC PARTNERSGo to our site: http://www.fcpartners.com.br