Next Generation System-Wide Liquidity Stress Testing

Abstract

This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF/OeNB or IMF/OeNB policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. A framework to run system-wide, balance sheet data-based liquidity stress tests is presented. The liquidity framework includes three elements: (a) a module to simulate the impact of bank run scenarios; (b) a module to assess risks arising from maturity transformation and rollover risks, implemented either in a simplified manner or as a fully-fledged cash flow-based approach; and (c) a framework to link liquidity and solvency risks. The framework also allows the simulation of how banks cope with upcoming regulatory changes (Basel III), and accommodates differences in data availability. A case study shows the impact of a "Lehman" type event for stylized banks.

Assessing banks’ resilience: A complementary approach to stress testing using fair values from banks’ financial statements

“…The current design of stress test focuses on financial institutions' preparedness to face external shocks due to a crisis; thus, it primarily emphasizes the importance of solvency (Iyengar et al, 2017). Yet, extant research suggests that liquidity is paramount in assessing a bank's resilience, and it should be an even greater concern than solvency (Schmieder et al, 2012). The 2007-2009 financial crisis showcased the importance of liquidity risk because banks increasingly rely on short-term funding to finance their asset growth (Ryan, 2017).…”

A Liquidity Shortfall Analysis Framework for the European Banking Sector

“…A number of studies, such as Basel Committee on Banking Supervision (BCBS) [13], BCBS [14] and Schmieder et al [15], have reviewed the main sources of liquidity risk and the best practices in banks' liquidity stress testing. Halaj and Henry [16] identify and specify guiding principles for designing and implementing a systemic liquidity stress test.…”

“…Halaj and Henry [16] identify and specify guiding principles for designing and implementing a systemic liquidity stress test. While the conceptual framework in this paper is similar to Schmieder et al [15], their analysis is rather theoretical, relying on a case study to illustrate the potential use of the proposed cash-flow-based tests by regulators and supervisors.…”

A Liquidity Risk Stress-Testing Framework with Basel Liquidity Standards

“…Another advanced model is the Bank of England's RAMSI model , which includes an interbank network model and an asset price function to simulate fi re sales of assets and satellite models for credit risk. More advanced liquidity stress tests in integrated stress-testing frameworks combining credit, market and liquidity risk models are also used by other supervisory authorities (e.g., the Canadian and Norwegian central banks or the IMF (Čihák, 2007;Schmieder et al, 2012). In this way, the eff ect of a credit shock generated by a macro-fi nancial scenario on a bank's liquidity or funding sources is tested (see, for example, Gauthier and Souissi, 2010).…”

“…A decrease in liquidity infl ows due to growth in non-performing loans or the credit spread in the case of bonds is considered most often. Some models also test the reverse linkage, where increased funding costs and/or losses on fi re sales of assets aff ect the solvency of banks via their profi t and loss accounts (Cetina, 2015;Puhr and Schmitz, 2014;Schmieder et al, 2012). Systemic feedback eff ects caused by banks' reactions (e.g., van den End, 2012), including interbank contagion (e.g., Bank of Korea, 2012;Gauthier and Souissi, 2010), are thus an integral part of advanced tests.…”