Stress-testing Model for Structural Liquidity Risk
Stress-testing Model for Structural Liquidity Risk

Author(s): Eugenia Schmitt
Subject(s): Micro-Economics, Methodology and research technology, Economic development, Accounting - Business Administration
Published by: Masarykova univerzita nakladatelství
Keywords: liquidity risk; banking; stress-tests; value at risk; regulatory requirements;
Summary/Abstract: The financial crisis of past decades has shown the need to take into account liquidity risk in stress-testing frameworks in an explicit way. The stress-testing model presented in this paper provides an answer to the fundamental question of the risk management: What hypothetical costs a bank should expect for liquidity provision in a particular point of time by the negative development of future financing conditions? Its key components are the cash flow scenarios under consideration the counterbalancing capacity (CBC) and the liquidity spread scenarios developed by historical simulation approach. This enables the view on to the realistic risk, after exhaustion of compensation capacity. Multiple dimensions of liquidity risk are combined with two quantitative risk measures, Value-at-Risk (VaR) and Expected Shortfall (ES). The analytical components of liquidity risk management that are needed to address the new Basel III are taken into account. Additionally to calculation of liquidity costs, detailed analyses of liquidity needs are possible. An application on a typical middle sized bank in a case study illustrates how sensitive VaR and ES are to the shocks.

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