Market and Funding Liquidity Stress Testing of the Luxembourg Banking Sector
AbstractThis paper performs market and funding liquidity stress testing of the Luxembourg banking sector using stochastic haircuts and run-off rates. It takes into account not only the shocks to the banking sector and banks? responses to them, but second-round effects due to the effects of banks? reactions on asset prices and reputation. In general, banks? business lines and, therefore their buffers? composition, determine the net effect of the shocks on banks? stochastic liquidity buffers. So, results differ across banks. Second-round effects exemplify the relevance of contagion effects that reduce the systemic benefits of diversification. While systemic liquidity risk is low following a shock to the interbank market, for Luxembourg, with its high number of subsidiaries of large foreign financial institutions, the results indicate the importance of monitoring the liquidity of parent groups to which Luxembourg institutions belong. In particular, shocks to related-party deposits are important. Finally, the results, including those of a run-on-deposits shock, show the relevance of system-wide measures to minimize the systemic effects of liquidity crises.
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Bibliographic InfoPaper provided by Central Bank of Luxembourg in its series BCL working papers with number 45.
Length: 38 pages
Date of creation: May 2010
Date of revision:
Contact details of provider:
Web page: http://www.bcl.lu/
stress test; liquidity risk; banks; stochastic; contagion; macro-prudential;
Find related papers by JEL classification:
- E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
- C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
- G2 - Financial Economics - - Financial Institutions and Services
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