Liquidity Stress-Tester: Do Basel III and Unconventional Monetary Policy Work?
AbstractThis paper presents a macro stress-testing model for liquidity risks of banks, incorporating the proposed Basel III liquidity regulation, unconventional monetary policy and credit supply effects. First and second round (feedback) effects of shocks are simulated by a Monte Carlo approach. Banks react according to the Basel III standards, endogenising liquidity risk. The model shows how banks' reactions interact with extended refinancing operations and asset purchases by the central bank. The results indicate that Basel III limits liquidity tail risk, in particular if it leads to a higher quality of liquid asset holdings. The flip side of increased bond holdings is that monetary policy conducted through asset purchases gets more influence on banks relative to refinancing operations.
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Bibliographic InfoPaper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 269.
Date of creation: Dec 2010
Date of revision:
banking; financial stability; stress-tests; liquidity risk;
Other versions of this item:
- Jan Willem van den End, 2012. "Liquidity stress-tester: do Basel III and unconventional monetary policy work?," Applied Financial Economics, Taylor & Francis Journals, vol. 22(15), pages 1233-1257, August.
- 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-2010-12-18 (All new papers)
- NEP-BAN-2010-12-18 (Banking)
- NEP-BEC-2010-12-18 (Business Economics)
- NEP-CBA-2010-12-18 (Central Banking)
- NEP-MON-2010-12-18 (Monetary Economics)
- NEP-RMG-2010-12-18 (Risk Management)
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- Neagu, Florian & Mihai, Irina, 2013. "Sudden stop of capital flows and the consequences for the banking sector and the real economy," Working Paper Series 1591, European Central Bank.
- Christiaan Pattipeilohy & Jan Willem van den End & Mostafa Tabbae & Jon Frost & Jakob de Haan, 2013.
"Unconventional monetary policy of the ECB during the financial crisis: An assessment and new evidence,"
DNB Working Papers
381, Netherlands Central Bank, Research Department.
- Jakob de Haan & Willem van den End & Jon Frost & Christiaan Pattipeilohy & Mostafa Tabbae, 2013. "Unconventional Monetary Policy of the ECB during the Financial Crisis: An Assessment and New Evidence," SUERF 50th Anniversary Volume Chapters, SUERF - The European Money and Finance Forum.
- Jan Willem van den End & Mark Kruidhof, 2012. "Modelling the liquidity ratio as macroprudential instrument," DNB Working Papers 342, Netherlands Central Bank, Research Department.
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