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Macroprudential Liquidity Stress Test : How To Cope With Liquidity Drains

Author

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  • Florian NEAGU

    (National Bank of Romania, Bucharest University of Economic Studies)

  • Irina MIHAI

    (National Bank of Romania, Bucharest University of Economic Studies)

Abstract

This paper develops a macroprudential liquidity stress-testing tool to seize possible consequences of a liquidity drain that manifests during a systemic crisis tailored to an emerging economy. The tool novelty resides in including feedback from the real economy also affected by a liquidity shock, quantifying the impact of the drop in the support from the banking group through foreign funding and the link between liquidity and solvency that matches emerging market features. The stress-testing tool aims to: (i) test the capacity of the banking sector to withstand liquidity drain and to gauge consequences to liquidity and solvency ratio, (ii) assess the impact on credit supply when the liquidity shock occurs, and (iii) evaluate some policy options, including liquidity deficit a central bank should accommodate. We apply the tool to the Romanian economy using two scenarios with different risk severity and discuss possible policy measures.

Suggested Citation

  • Florian NEAGU & Irina MIHAI, 2022. "Macroprudential Liquidity Stress Test : How To Cope With Liquidity Drains," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(4), pages 96-111, December.
    • Handle: RePEc:rjr:romjef:v::y:2022:i:4:p:96-111
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    References listed on IDEAS

    as
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    6. Nguyen, Thach Vu Hong & Ahmed, Shamim & Chevapatrakul, Thanaset & Onali, Enrico, 2020. "Do stress tests affect bank liquidity creation?," Journal of Corporate Finance, Elsevier, vol. 64(C).
    7. Stefan W. Schmitz & Michael Sigmund & Laura Valderrama, 2019. "The interaction between bank solvency and funding costs: A crucial effect in stress tests," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 48(2), July.
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    Cited by:

    1. Wentao GU & Wanting QI & Yutong WANG & Lixiang LI & Liyan PAN, 2024. "What Causes the Influence of Bank Channel towards Corporate Investment: Liquidity or Economic Policy Uncertainty?," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(3), pages 81-101, October.

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    More about this item

    Keywords

    banks; capital flows; systemic liquidity; stress-testing tool; policy measures; emerging markets;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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