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Market and Funding Liquidity Stress Testing of the Luxembourg Banking Sector

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  • Francisco Nadal De Simone
  • Franco Stragiotti

Abstract

This paper performs market and funding liquidity stress testing of the Luxembourg banking sector using stochastic haircuts and run-off rates. It takes into account not only the shocks to the banking sector and banks? responses to them, but second-round effects due to the effects of banks? reactions on asset prices and reputation. In general, banks? business lines and, therefore their buffers? composition, determine the net effect of the shocks on banks? stochastic liquidity buffers. So, results differ across banks. Second-round effects exemplify the relevance of contagion effects that reduce the systemic benefits of diversification. While systemic liquidity risk is low following a shock to the interbank market, for Luxembourg, with its high number of subsidiaries of large foreign financial institutions, the results indicate the importance of monitoring the liquidity of parent groups to which Luxembourg institutions belong. In particular, shocks to related-party deposits are important. Finally, the results, including those of a run-on-deposits shock, show the relevance of system-wide measures to minimize the systemic effects of liquidity crises.

Suggested Citation

  • Francisco Nadal De Simone & Franco Stragiotti, 2010. "Market and Funding Liquidity Stress Testing of the Luxembourg Banking Sector," BCL working papers 45, Central Bank of Luxembourg.
  • Handle: RePEc:bcl:bclwop:bclwp045
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    File URL: https://www.bcl.lu/fr/Recherche/publications/cahiers_etudes/45/BCLWP045.pdf
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    References listed on IDEAS

    as
    1. Franco Stragiotti, 2009. "Stress testing and contingency funding plans: an analysis of current practices in the Luxembourg banking sector," BCL working papers 42, Central Bank of Luxembourg.
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    Cited by:

    1. Bank for International Settlements, 2011. "The impact of sovereign credit risk on bank funding conditions," CGFS Papers, Bank for International Settlements, number 43, May.

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    More about this item

    Keywords

    stress test; liquidity risk; banks; stochastic; contagion; macro-prudential;
    All these keywords.

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • G2 - Financial Economics - - Financial Institutions and Services

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