Liquidity stress testing for the EU financial system - Tool inventory and desktop illustrations

This paper reviews system-wide liquidity stress-testing (SLST) frameworks in the European Union and illustrates the impact of a common aggregate liquidity shock on the EU financial system using a range of modelling approaches. Motivated by recent episodes of market turmoil, including the COVID-19 crisis, the 2022 energy shock and the 2023 banking stress, the analysis focuses on the propagation of liquidity stress across financial sectors and institutions. The paper combines a survey of SLST practices among EU authorities, a mapping of cross-sectoral financial interconnections in the euro area, and stress-testing simulations based on jurisdiction-specific models, an ESRB cross-sectoral balance sheet tool and the ECB’s system-wide stress-testing framework. The results suggest that the financial system remains broadly resilient to a severe aggregate liquidity shock over a 30-day horizon, with net outflows ranging from 0.5% to 0.7% of total financial assets. However, second-round effects, including fire sales, mark-to-market losses and behavioural responses, can significantly amplify the initial shock. The findings highlight the importance of financial interconnections, the role of non-bank financial intermediaries in shock transmission and the stabilising effect of central bank interventions. This paper also provides a stocktake of existing SLST practices and discusses priorities for the further development of SLST in Europe. JEL Classification: C63, G01, G21, G23, G28, E58