Banks' Strategic Interaction, Adverse Price Dynamics and Systemic Liquidity Risk

Krüger, Ulrich; Roling, Christoph; Silbermann, Leonid; Wong, Lui Hsian

doi:10.2139/ssrn.4072253

Cited by 2 publications

(2 citation statements)

References 26 publications

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“…After all, slumping prices affect traded securities and reduce the market value of the remaining portion of the assets. We refer to Appendix A.1 for more detailed explanations regarding the intuition of the expressions for each of the four cases and to Krüger, Roling, Silbermann, and Wong (2022) for the proof of Theorem 2.1. A symmetric version of the theorem holds for bank 2, given that bank 1 has decided on its strategy.…”

Section: Optimisation Modelmentioning

confidence: 99%

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Bank’s strategic interaction, adverse price dynamics, and systemic liquidity risk

Krüger

Roling

Silbermann

et al. 2023

Preprint

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In this paper, we introduce two measures, the Systemic Liquidity Buffer (SLB) and the Systemic Liquidity Shortfall (SLS), to assess liquidity in the banking system. The SLB takes an aggregated perspective on liquidity risks in the banking system. In contrast, the SLS focuses on the problematic banks which suffer a liquidity shortfall. These measures provide an add-on to regulatory liquidity measures such as the LCR because they better incorporate a systemic perspective: (1) They model the impact of a funding shock by valuing assets at depressed market prices, (2) Doing so, they explicitly incorporate banks’ strategic responses to a market undergoing sharp price declines. We test our approach using several applications capturing both a short (5 days) and a medium-term (30 days) stress scenario, a sudden rise in interest rates, the impact of banks’ US dollar business, and the recent COVID-19 crisis. JEL classification: C63, G01, G17, G21, G28.

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Section: Optimisation Modelmentioning

confidence: 99%

“…N = 2, the optimisation problem (2.3) and the more general problem (3.4) below are equivalent. We refer toKrüger et al (2022) for the proof.…”

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confidence: 99%

Bank’s strategic interaction, adverse price dynamics, and systemic liquidity risk

Krüger

Roling

Silbermann

et al. 2023

Preprint

Self Cite

View full text Add to dashboard Cite

show abstract

Bank’s strategic interaction, adverse price dynamics and systemic liquidity risk

Krüger,

Roling,

Silbermann

et al. 2024

J Bank Regul

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When a widespread funding shock hits the banking system, banks may engage in strategic behaviour to deal with funding shortages by a pre-emptive disposal of assets. Alternatively, they may adopt a more cautious strategy to mitigate price reactions, thereby distributing the assets sales into smaller portions over time. We model banks’ optimal behaviour using standard optimisation techniques and show that an equilibrium always exits in a stylised setting. A numerical analysis to approximate the equilibrium supplements the theoretical part. The implementation delivers two liquidity measures for the German banking system: the Systemic Liquidity Buffer and the Systemic Liquidity Shortfall. These measures are more informative about systemic liquidity risk than regulatory liquidity measures, such as the LCR, because they model adverse, nonlinear price dynamics in a more realistic way. Our approach is applied to different stress scenarios.

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Banks' Strategic Interaction, Adverse Price Dynamics and Systemic Liquidity Risk

Cited by 2 publications

References 26 publications

Bank’s strategic interaction, adverse price dynamics, and systemic liquidity risk

Bank’s strategic interaction, adverse price dynamics, and systemic liquidity risk

Bank’s strategic interaction, adverse price dynamics and systemic liquidity risk

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