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How resilient are Hungarian banks to liquidity shocks?

Author

Listed:
  • Tamás Balás

    () (Magyar Nemzeti Bank (central bank of Hungary))

  • Csaba Móré

    () (Magyar Nemzeti Bank (central bank of Hungary))

Abstract

For central banks, monitoring banks’ liquidity risk is of great importance from a financial stability perspective. One essential gauge for assessing liquidity risk exposure is whether banks have sufficient liquidity buffers to survive a potential unexpected funding crisis. In this article, we aim to assess the resilience of Hungarian banks to liquidity shocks by using a liquidity stress test. The test is based on a hypothetical stress scenario involving a bank-specific liquidity shock, triggered by a confidence crisis,for example. The shock absorbing capacity of a bank is measured by the maximum degree of liquidity shock the bank can withstand over the short run on the strength of its liquid assets. On the basis of the results of the stress test it is believed that the current liquidity risks essentially do not pose a threat to financial stability. As for large banks, with the overwhelming part of customer deposits, the current liquidity buffers would typically enable the maintenance of liquidity even under extreme circumstances. It should be noted, however, that Hungarian banks are increasingly exposed to fluctuations in global liquidity and that intra-group financing relations may represent a contagion channel. Therefore, in the future, the study of these risk scenarios may be important in further developing stress testing practices for both the central bank and commercial banks.

Suggested Citation

  • Tamás Balás & Csaba Móré, 2007. "How resilient are Hungarian banks to liquidity shocks?," MNB Bulletin (discontinued), Magyar Nemzeti Bank (Central Bank of Hungary), vol. 2(1), pages 6-11, June.
  • Handle: RePEc:mnb:bullet:v:2:y:2007:i:1:p:6-11
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    File URL: http://www.mnb.hu/letoltes/bulletin-2007june-balas-more.pdf
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    Keywords

    bank liquidity; liquidity risk; stress testing.;

    JEL classification:

    • 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

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