A Liquidity Risk Stress-Testing Framework with Interaction between Market and Credit Risks

Wong, Eric; Hui, Cho‐Hoi

doi:10.2139/ssrn.1370826

Cited by 36 publications

(30 citation statements)

References 20 publications

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“…The framework quantifies liquidity risk by estimating the expected cash shortage time and the expected default time of banks. The stress-testing framework explicitly captures the link between default risk and deposit outflows, not only are the interaction of the risks incorporated but also their contagious effects [33].…”

Section: Literature Reviewmentioning

confidence: 99%

Model of Stress-testing of Banks’ Liquidity Risk in Ukraine

Krykliy¹,

Лучко²

2018

FMIR

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The global financial crisis has shown how important is the role of liquidity risk in ensuring the stability of the banking system, and revealed a number of deficiencies in its regulation, both at the level of individual banks and at the level of banking regulation and supervision. It is necessary to develop new instruments and improve of existing instruments for protection the banking system from the negative effects of liquidity risk. These tools necessarily include stress testing of liquidity risk. In order to increase the efficiency of liquidity risk management of Ukrainian banks at micro and macro levels, the authors propose to apply stress testing of liquidity of assets. The stress-testing model is based on three phases: the formation of a liquidity deficit in the balance as a primary effect of the shocks; bank reactions to shocks; feedback effects from shocks. According to the model, the liquidity buffer is calculated and the banks have sufficient liquid assets to cover the liquidity deficit. The model was tested on a group of Ukrainian banks with a state stake (JSB "Ukrgasbank", JSC "Oschadbank", JSC "Ukreximbank" and PJSC "PrivatBank"), the impact of which on the banking system of Ukraine is the most significant, based on data from 2012 to 2016. According to the results of the study, it was determined that with a sufficient amount of assets liquidity buffers in state-owned banks, their quality remains rather low, the share of secondary reserves in banks is critically low. For the crucial role of this segment in the Ukrainian banking system, it is necessary to improve the liquidity management system of this group of banks, including, in order to minimize the systemic liquidity risk. This test may use prudential oversight bodies as an appropriate alternative to available liquidity risk assessment tools (primarily established by the NBU for liquidity ratios) at both micro and macro levels of liquidity regulation.

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Section: Literature Reviewmentioning

confidence: 99%

Model of Stress-testing of Banks’ Liquidity Risk in Ukraine

Krykliy¹,

Лучко²

2018

FMIR

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“…The framework simulates banks' liquidity positions conditional on their capitalization under stress, and other relevant dimensions, such as a decrease in confidence among market participants under stress. Wong and Hui (2009) explicitly capture the link between default risk and deposit outflows. Their framework allows simulating the impact of mark-to-market losses on banks' solvency position leading to deposit outflows; asset fire sales by banks is evaporating and contingent liquidity risk sharply increases.…”

Section: Appendix I Fsap Liquidity Stress Tests Since Fy2011mentioning

confidence: 99%

Macroprudential Liquidity Stress Testing in FSAPs for Systemically Important Financial Systems

Jobst

Ong²,

Schmieder³

2017

IMF Working Papers

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Bank liquidity stress testing, which has become de rigueur following the costly lessons of the global financial crisis, remains underdeveloped compared to solvency stress testing. The ability to adequately identify, model and assess the impact of liquidity shocks, which are infrequent but can have a severe impact on affected banks and financial systems, is complicated not only by data limitations but also by interactions among multiple factors. This paper provides a conceptual overview of liquidity stress testing approaches for banks and discusses their implementation by IMF staff in the Financial Sector Assessment Program (FSAP) for countries with systemically important financial sectors over the last six years.

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“…The concept of banking sector liquidity and its interaction with solvency has been analysed extensively in the literature, especially since the fall of Lehman Brothers. Researchers have examined the interaction between the deposit outfl ow rate and the probability of default (Wong and Hui, 2009) and profi tability (Komárková et al, 2011;Geršl et al, 2016), among other things. Close interlinkages have also been found between various solvency indicators and the rating of a bank and its funding costs (BIS, 2015).…”

Section: Introduction and Literaturementioning

confidence: 99%

A Liquidity Risk Stress-Testing Framework with Basel Liquidity Standards

Hejlová¹,

Komarkova²,

Rusnák³

2020

Prague Economic Papers

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We present a macro stress-testing model for banks' market and funding liquidity risks with a survival period of one year. The model follows the main principles of the Basel standards LCR and NSFR. Besides, the model takes into account the impact of both bank-specific and market-wide scenarios and includes second-round effects of shocks due to banks' feedback reactions. The presented methodology is then applied to a sample of Czech banks. This allows us to monitor the sensitivity of their liquidity position to the combination of shocks under consideration.

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A Liquidity Risk Stress-Testing Framework with Interaction between Market and Credit Risks

Cited by 36 publications

References 20 publications

Model of Stress-testing of Banks’ Liquidity Risk in Ukraine

Model of Stress-testing of Banks’ Liquidity Risk in Ukraine

Macroprudential Liquidity Stress Testing in FSAPs for Systemically Important Financial Systems

A Liquidity Risk Stress-Testing Framework with Basel Liquidity Standards

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