Macroprudential Liquidity Stress Testing in FSAPs for Systemically Important Financial Systems

Abstract

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.

Basel Iii Regülasyonunu Tamamlayici Bi̇r Li̇ki̇di̇te Stres Testi̇ Metodoloji̇si̇: Türki̇ye Uygulamasi

“…Scenario design is based on assumptions for rollover and haircut ratios of different liabilities and assets respectively to measure the extent to which the counterbalancing capacity of the bank (via selling liquid unencumbered assets if necessary) could withstand the net cash outflow. As such, it sets out the first version of the "Next Generation System-Wide Liquidity Stress Testing" template of IMF which will soon be enhanced by (Schmieder et al, 2012) and (Jobst et al, 2017). We see that last two papers (i) solely focus on the liquidity risk, (ii) benefit from previous ones, (iii) enhance the aforementioned Excel tool and thus the methodology, (iv) attempt to link liquidity and solvency risks.…”

Integrating Solvency and Liquidity Stress Tests

“…For liquidity (and partly also solvency) stress tests, banks assess the expected cash inflows from asset liquidation and secured funding in a stressed environment. Hence, assumptions about the decline in asset values and the extent to which assets are subject to haircuts when used as collateral for wholesale funding, affect the calculations of CBC and cash flows (Jobst 2017).…”

Systemic liquidity contagion in the European interbank market

“…The global financial crisis of 2007/08 has shown how fundamental is the role of liquidity risk in the stability of the financial system. Recently, an IMF Working Paper on macroprudential stress testing has pointed out that liquidity shocks can rapidly manifest and impact the whole financial system, while bank solvency concerns tend to take more time to build up (Jobst et al 2017). On the same line, the Bank of England (Kapadia et al 2012) has drawn attention to the fact that "although the failure of a financial institution may reflect solvency concerns, it often manifests itself through crystallization of funding liquidity risk."…”

“…The former is related to the fact that the bank is not able to meet its liquidity needs in case of a funding shock, while the latter refers to the case where an institution is not able to buy or sell securities without a huge price impact, usually measured by the bid-ask spread. The literature has shown that while distinct in nature, the increased reliance on wholesale bank funding has made the two liquidity risks strongly connected, with possible feedback and spiral effect between the two, especially during distress periods (Brunnermeier and Pedersen 2008;Cai and Thakor 2008;Brunnermeier 2009;Bonfim and Kim 2012a, b;Drehmann and Nikolaou 2013;Jobst et al 2017). Additionally, funding shocks may originate not only from depositor run but from the interbank funding market as well, a clear example is the case of Northern Rock in 2012.…”