Liquidity Stress-Tester: A macro model for stress-testing banks' liquidity risk
AbstractThis paper presents a macro stress-testing model for market and funding liquidity risks of banks, which have been main drivers of the recent financial crisis. The model takes into account the first and second round (feedback) effects of shocks, induced by behavioural reactions of heterogeneous banks, and idiosyncratic reputation effects. The impact on liquidity risk is simulated by a Monte Carlo approach. This generates distributions of liquidity buffers for each scenario round, including the probability of a liquidity shortfall. An application to Dutch banks illustrates that the second round effects have more impact than the first round effects and hit all types of banks, indicative of systemic risk. This lends support policy initiatives to enhance banks' liquidity buffers and liquidity risk management, which could also contribute to prevent financial stability risks.
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Bibliographic InfoPaper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 175.
Date of creation: May 2008
Date of revision:
banking; financial stability; stress-tests; liquidity risk;
Other versions of this item:
- Jan Willem van den End, 2010. "Liquidity Stress-Tester: A Model for Stress-testing Banks' Liquidity Risk," CESifo Economic Studies, CESifo, vol. 56(1), pages 38-69, March.
- C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-05-31 (All new papers)
- NEP-BAN-2008-05-31 (Banking)
- NEP-BEC-2008-05-31 (Business Economics)
- NEP-CFN-2008-05-31 (Corporate Finance)
- NEP-FMK-2008-05-31 (Financial Markets)
- NEP-MAC-2008-05-31 (Macroeconomics)
- NEP-RMG-2008-05-31 (Risk Management)
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