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Estimating financial institutions´ intraday liquidity risk: a Monte Carlo simulation approach

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  • Carlos Léon

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Abstract

The 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 Info

Paper provided by BANCO DE LA REPÚBLICA in its series BORRADORES DE ECONOMIA with number 009441.

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Length: 30
Date of creation: 11 Apr 2012
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Handle: RePEc:col:000094:009441

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Related research

Keywords: Payments Systems; Intraday; Liquidity Risk; Bivariate Poisson process; Monte Carlo Simulation; Liquidity Buffer; Oversight.;

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  1. Kenneth French & Martin Baily & John Campbell & John Cochrane & Douglas Diamond & Darrell Duffie & Anil Kashyap & Frederic Mishkin & Raghuram Rajan & David Scharfstein & Robert Shiller & Hyun Song Shi, 2010. "The Squam Lake Report: Fixing the Financial System," Journal of Applied Corporate Finance, Morgan Stanley, Morgan Stanley, vol. 22(3), pages 8-21.
  2. Clara Machado & Carlos León & Miguel Sarmiento & Freddy Cepeda, 2011. "Riesgo Sistémico Y Estabilidad Del Sistema De Pagos De Alto Valor En Colombia: Análisis Bajo Topología De Redes Y Simulación De Pagos," ENSAYOS SOBRE POLÍTICA ECONÓMICA, BANCO DE LA REPÚBLICA - ESPE, BANCO DE LA REPÚBLICA - ESPE.
  3. Carlos León & Clara Machado & Freddy cepeda & Miguel Sarmiento, 2011. "Too-connected-to-fail Institutions and Payments System´s Stability: Assessing Challenges for Financial Authorities," BORRADORES DE ECONOMIA, BANCO DE LA REPÚBLICA 008155, BANCO DE LA REPÚBLICA.
  4. Carlos León Rincón & Alejandro Reveiz, 2011. "Montecarlo simulation of long-term dependent processes: a primer," BORRADORES DE ECONOMIA, BANCO DE LA REPÚBLICA 008277, BANCO DE LA REPÚBLICA.
  5. Morten L. Bech, 2008. "Intraday liquidity management: a tale of games banks play," Economic Policy Review, Federal Reserve Bank of New York, Federal Reserve Bank of New York, issue Sep, pages 7-23.
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