Liquidity at risk: Joint stress testing of solvency and liquidity

Cont, Rama; Kotlicki, Artur; Valderrama, Laura

doi:10.1016/j.jbankfin.2020.105871

Cited by 31 publications

(29 citation statements)

References 11 publications

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“…Brokered deposits, although considered riskier and allowed only for well-capitalized banks, prove to be a great source of liquidity and confidence, thus being an important feature in explaining bank risk. Cont et al (2020) specifically demonstrate the negative impact of liquidity shortages-through the new financing costs that arise-and of fire sales on bank solvency. Our results confirm their assertions.…”

Section: Resultsmentioning

confidence: 93%

Modeling the Connection between Bank Systemic Risk and Balance-Sheet Liquidity Proxies through Random Forest Regressions

Zeldea

2020

Administrative Sciences

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Balance-sheet indicators may reflect, to a great extent, bank fragility. This inherent relationship is the object of theoretical models testing for balance-sheet vulnerabilities. In this sense, we aim to analyze whether systemic risk for a sample of US banks can be explained by a series of balance-sheet variables, considered as proxies for bank liquidity for the 2004:1–2019:1 period. We first compute Marginal Expected Shortfall values for the entities in our sample and then imbed them into a Random Forest regression setup. Although we discover that feature importance is rather bank-specific, we notice that cash and available-for-sale securities are the most relevant factors in explaining the dynamics of systemic risk. Our findings emphasize the need for heightened prudential regulation of bank liquidity, particularly in what concerns cash and immediate liquidity instrument weights. Moreover, systemic risk could be consistently tamed by consolidating bank emergency liquidity provision schemes.

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Section: Resultsmentioning

confidence: 93%

Modeling the Connection between Bank Systemic Risk and Balance-Sheet Liquidity Proxies through Random Forest Regressions

Zeldea

2020

Administrative Sciences

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“…The latter suggest that the enforcement of solvency requirements alone was ineffective in addressing systemic instability caused by fire sales. From another perspective, Cont et al (2019) are among the few authors who develop a structural framework for the joint stress testing of solvency and liquidity in order to quantify the liquidity resources required for a financial institution facing a stress scenario. Given the existence of conflicting pieces of evidence, further work is needed to design an appropriate framework including capital and liquidity interactions.…”

Section: Literature Reviewmentioning

confidence: 99%

Determinants of banks’ liquidity: A French perspective on interactions between market and regulatory requirements

Bandt

Lecarpentier

Pouvelle

2021

Journal of Banking & Finance

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“…Batischeva et al (2018) investigate the effect of the interaction of a region and its banking system, the approaches to analyzing bank activities on the region and its socio-economic indicators. Cont et al (2020) applied liquidity stress tests, in parallel to and independently from solvency stress tests, based on scenarios that may not be consistent with those used in solvency stress tests in banks.…”

Section: Theoretical Basismentioning

confidence: 99%

A model for analyzing the financial stability of banks in the VUCA-world conditions

Khalatur

Velychko

Pavlenko

et al. 2021

Banks and Bank Systems

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VUСA is a chaotic and rapidly changing business environment that, based on the variability, uncertainty, complexity and ambiguity of the modern world, transforms the approach of banks to the analysis of financial stability. The aim of the paper is to improve tools for monitoring the impact of VUCA-world conditions on the financial stability of banks, namely a model for studying and analyzing the impact of the modern business space “VUCA” on the financial stability of the country's banks. To test the model, the method of constructing regression equations in multifactor regression analysis is used. For this study, data from some Eastern European countries (Ukraine, Belarus, Latvia, Lithuania, Moldova) were used, and time series data were used for 10 years from 2010 to 2019.Having considered the definition of “VUCA-world conditions”, the model of modern business space “VUCA” was developed when analyzing the activity of banks in the studied countries. Drivers, consequences, requirements and macroeconomic indicators of the countries’ activities in the VUСA-world conditions are determined. The VUCA-world conditions also consider the study of key macroeconomic indicators that allow building long-term relationships throughout the value chain. The analysis of the studied Eastern European countries showed that with the increase of factors of GDP growth, GNI per capita growth, research and development costs, foreign direct investment, and net inflow of 1%, the effective ratio of bank capital and assets also increases. The assessment, in contrast to the existing ones, makes it possible to consider the impact of the macroeconomic environment of banks on their financial stability.

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Liquidity at risk: Joint stress testing of solvency and liquidity

Cited by 31 publications

References 11 publications

Modeling the Connection between Bank Systemic Risk and Balance-Sheet Liquidity Proxies through Random Forest Regressions

Modeling the Connection between Bank Systemic Risk and Balance-Sheet Liquidity Proxies through Random Forest Regressions

Determinants of banks’ liquidity: A French perspective on interactions between market and regulatory requirements

A model for analyzing the financial stability of banks in the VUCA-world conditions

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