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Liquidity Stress-Tester: Do Basel III and Unconventional Monetary Policy Work?

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  • Jan Willem van den End

Abstract

This 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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File URL: http://www.dnb.nl/en/binaries/269%20-%20Liquidity%20Stress-Tester_tcm47-243122.pdf
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Bibliographic Info

Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 269.

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Date of creation: Dec 2010
Date of revision:
Handle: RePEc:dnb:dnbwpp:269

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Keywords: banking; financial stability; stress-tests; liquidity risk;

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Cited by:
  1. 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.
  2. 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.
  3. 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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