Bank-Level Liquidity Stress-Testing

Clemens Bonner, Iman van Lelyveld and Andreas Katteneder

Liquidity stress-testing can be seen as a thorough analysis of an institution’s ability to cover net cash outflows. It complements Pillar 1 standards, such as the liquidity coverage ratio (LCR) or net stable funding ratio (NSFR), as it can take into account different time horizons, different stress scenarios and additionally account for institution-specific and country-specific factors.

Stress-testing is an important tool for banks as part of their internal risk management. By providing forward-looking risk assessments, facilitating the development of risk mitigation or contingency plans, the implementation of adequate liquidity-specific stress tests is important for both regulators and banks themselves (Basel Committee on Banking Supervision 2009).

Liquidity is typically managed assuming “business as usual”. However, since liquidity crises tend to occur suddenly, a bank is expected to manage liquidity under stressed conditions in order to identify and quantify its exposures, analysing possible impacts on the bank’s cashflow profile, liquidity position, profitability and solvency. Liquidity stress tests measure a bank’s ability to meet its payment obligations on time at

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