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Liquidity Stress Testing with Second-Round Effects: Application to the Czech Banking Sector

Author

Listed:
  • Adam Gersl

    (Joint Vienna Institute
    Czech National Bank
    Charles University in Prague, Institute of Economic Studies)

  • Zlatuse Komarkova

    (Czech National Bank
    Charles University in Prague, Institute of Economic Studies)

  • Lubos Komarek

    (Czech National Bank
    Technical University of Ostrava
    University of Finance and Administration, Prague)

Abstract

We build a macro stress-testing model for banks’ market and funding liquidity risks with a survival period of one month. 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 model has three phases: (i) the formation of a balance-sheet liquidity shortfall, (ii) the reaction of banks on financial markets, and (iii) the feedback effects of shocks, such as secondary deposit outflows for reacting banks and additional haircuts on securities. During each phase, we recount the liquidity buffer and examine whether banks hold a sufficiently large amount of liquid assets to be able to survive the liquidity tension in their balance sheets. The framework is applied to the Czech banking sector to illustrate typical calibrations and the impact on banks.

Suggested Citation

  • Adam Gersl & Zlatuse Komarkova & Lubos Komarek, 2016. "Liquidity Stress Testing with Second-Round Effects: Application to the Czech Banking Sector," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 66(1), pages 32-49, February.
  • Handle: RePEc:fau:fauart:v:66:y:2016:i:1:p:32-49
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    File URL: http://journal.fsv.cuni.cz/storage/1347_gersl.pdf
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    References listed on IDEAS

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    Cited by:

    1. Zlatuse Komarkova & Marek Rusnak & Hana Hejlova, 2016. "The Relationship between Liquidity Risk and Credit Risk in The CNB's Liquidity Stress Tests," Occasional Publications - Chapters in Edited Volumes, in: CNB Financial Stability Report 2015/2016, chapter 0, pages 127-136, Czech National Bank.

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    More about this item

    Keywords

    banking; financial stability; liquidity risk; stress testing;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G19 - Financial Economics - - General Financial Markets - - - Other
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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