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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.

Suggested Citation

  • Jan Willem van den End, 2010. "Liquidity Stress-Tester: Do Basel III and Unconventional Monetary Policy Work?," DNB Working Papers 269, Netherlands Central Bank, Research Department.
  • Handle: RePEc:dnb:dnbwpp:269
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    References listed on IDEAS

    as
    1. Claudio Borio & Mathias Drehmann, 2011. "Toward an Operational Framework for Financial Stability: “Fuzzy” Measurement and Its Consequences," Central Banking, Analysis, and Economic Policies Book Series,in: Rodrigo Alfaro (ed.), Financial Stability, Monetary Policy, and Central Banking, edition 1, volume 15, chapter 4, pages 063-123 Central Bank of Chile.
    2. van den End, Jan Willem & Tabbae, Mostafa, 2012. "When liquidity risk becomes a systemic issue: Empirical evidence of bank behaviour," Journal of Financial Stability, Elsevier, vol. 8(2), pages 107-120.
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    Citations

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    Cited by:

    1. Jan Willem van den End & Mark Kruidhof, 2013. "Modelling the liquidity ratio as macroprudential instrument," Journal of Banking Regulation, Palgrave Macmillan, vol. 14(2), pages 91-106, April.
    2. Zlatuse Komarkova & Marek Rusnak & Hana Hejlova, 2016. "The Relationship between Liquidity Risk and Credit Risk in The CNB's Liquidity Stress Tests," Occasional Publications - Chapters in Edited Volumes,in: CNB Financial Stability Report 2015/2016, chapter 0, pages 127-136 Czech National Bank, Research Department.
    3. 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.
    4. Jakob de Haan & Willem van den End & Jon Frost & Christiaan Pattipeilohy & Mostafa Tabbae, 2013. "Unconventional Monetary Policy of the ECB during the Financial Crisis: An Assessment and New Evidence," SUERF 50th Anniversary Volume Chapters, SUERF - The European Money and Finance Forum.
    5. Gabriele Galati & Richhild Moessner, 2014. "What do we know about the effects of macroprudential policy?," DNB Working Papers 440, Netherlands Central Bank, Research Department.
    6. Ashwin Madhou & Imad Moosa & Vikash Ramiah, 2015. "Working Capital as a Determinant of Corporate Profitability," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 18(04), pages 1-17, December.
    7. repec:eee:finana:v:53:y:2017:i:c:p:48-65 is not listed on IDEAS
    8. Oriol Carreras & E Philip Davis & Rebecca Piggott, 2016. "Macroprudential tools, transmission and modelling," National Institute of Economic and Social Research (NIESR) Discussion Papers 470, National Institute of Economic and Social Research.
    9. van Holle, Frederiek, 2017. "Essays in empirical finance and monetary policy," Other publications TiSEM 30d11a4b-7bc9-4c81-ad24-5, Tilburg University, School of Economics and Management.
    10. Mario Mustilli & Francesco Campanella & Eugenio D’Angelo, 2017. "Basel III and Credit Crunch: An Empirical Test with Focus on Europe," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 7(3), pages 1-3.
    11. Koliai, Lyes, 2016. "Extreme risk modeling: An EVT–pair-copulas approach for financial stress tests," Journal of Banking & Finance, Elsevier, vol. 70(C), pages 1-22.

    More about this item

    Keywords

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

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • 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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