Estimating financial institutions’ intraday liquidity risk: a Monte Carlo simulation approach
AbstractThe most recent financial crisis unveiled that liquidity risk is far more important and intricate than regulation have conceived. The shift from bank-based to market-based financial systems and from Deferred Net Systems to liquidity-demanding Real-Time Gross Settlement of payments explains some of the shortcomings of traditional liquidity risk management. Although liquidity regulations do exist, they still are in an early stage of development and discussion. Moreover, no all connotations of liquidity are equally addressed. Unlike market and funding liquidity, intraday liquidity has been absent from financial regulation, and has appeared only recently, after the crisis. This paper addresses the measurement of Large-Value Payment System’s intraday liquidity risk. Based on the generation of bivariate Poisson random numbers for simulating the minute-by-minute arrival of received and executed payments, each financial institution’s intraday payments time-varying volume and degree of synchrony (i.e. timing) is modeled. To model intraday payments’ uncertainty allows for (i) overseeing participants’ intraday behavior; (ii) assessing their ability to fulfill intraday payments at a certain confidence level; (iii) identifying participants non-resilient to changes in payments’ timing mismatches; (iv) estimating intraday liquidity buffers. Vis-à-vis the increasing importance of liquidity risk as a source of systemic risk, and the recent regulatory amendments, results are useful for financial authorities and institutions.
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Bibliographic InfoPaper provided by Banco de la Republica de Colombia in its series Borradores de Economia with number 703.
Date of creation: Apr 2012
Date of revision:
Payments Systems; Intraday; Liquidity Risk; Bivariate Poisson process; Monte Carlo Simulation; Liquidity Buffer; Oversight. Classification JEL: C15; C63; E47; G17; D81.;
Other versions of this item:
- Carlos Léon, 2012. "Estimating financial institutions’ intraday liquidity risk: a Monte Carlo simulation approach," BORRADORES DE ECONOMIA 009441, BANCO DE LA REPÚBLICA.
- Ove - Economic Development, Technological Change, and Growth - - - - -
- Cla - Mathematical and Quantitative Methods - - - - -
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-05-22 (All new papers)
- NEP-BAN-2012-05-22 (Banking)
- NEP-CBA-2012-05-22 (Central Banking)
- NEP-CMP-2012-05-22 (Computational Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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ENSAYOS SOBRE POLÍTICA ECONÓMICA,
BANCO DE LA REPÚBLICA - ESPE.
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