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Liquidity Risk Sensitivity of Czech Commercial Banks

Author

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  • Pavla Vodová

    (Department of Finance, School of Business Administration in Karviná, Silesian University in Opava, Univerzitní nám. 1934/3, 733 40 Karviná, Czech Republic)

Abstract

The recent financial crisis has shown that a liquidity risk plays an important role in the current developed financial system. One of the efficient tools of liquidity risk management is stress testing which can show banks their potential vulnerability to liquidity shocks. The aim of this paper is therefore to measure the liquidity risk sensitivity of Czech commercial banks and to find out the most severe scenario and the most vulnerable bank. Our sample included significant part of the Czech banking sector; we used unconsolidated balance sheet data over the period from 2000 to 2011 which were obtained from annual reports of Czech banks. We have evaluated liquidity risk of each bank in the sample via six different liquidity ratios. Then we stressed these baseline values in three stress scenarios: run on a bank (simulated by a 20% withdrawal of deposits), confidence crisis on the interbank market (simulated by a withdrawal of 20% of interbank deposits) and use of committed loans by counterparties (simulated by a 5% increase of loans provided to nonbank clients). We measured the impact of all scenarios by relative change of liquidity ratios. The impact of modelled liquidity shocks differs among scenarios. The most serious liquidity problems would be caused by the first scenario - run on a bank. The negative influence of third scenario (use of committed loans) is less severe. The confidence crisis on the interbank market would not affect bank liquidity at all. The results also show that the severity of the impact of all scenarios worsens in periods of financial distress. We have also found that large and medium sized banks are most vulnerable to liquidity shocks, mainly to massive deposit withdrawals.

Suggested Citation

  • Pavla Vodová, 2014. "Liquidity Risk Sensitivity of Czech Commercial Banks," Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, Mendel University Press, vol. 62(2), pages 427-436.
    • Handle: RePEc:mup:actaun:actaun_2014062020427
    DOI: 10.11118/actaun201462020427
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    References listed on IDEAS

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    1. Arion NEGRILÄ‚, 2010. "The Role of Stress-test Scenarios in Risk Management Activities and in the Avoidance of a New Crisis," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 2(2(543)), pages 5-24, February.
    2. Michael Boss & Gerhard Fenz & Gerald Krenn & Johannes Pann & Claus Puhr & Thomas Scheiber & Stefan W. Schmitz & Martin Schneider & Eva Ubl, 2008. "Stress Tests for the Austrian FSAP Update 2007: Methodology, Scenarios and Results," Financial Stability Report, Oesterreichische Nationalbank (Austrian Central Bank), issue 15, pages 68-92.
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