Liquidity Risk: The Case of the Brazilian Banking System

Benjamin M Tabak, Solange M Guerra, Sergio Rubens Stancato de Souza and Rodrigo Cesar de Castro Miranda

Stress tests are a widely used tool for risk management of financial institutions. Central banks and individual banks run these tests for determining potential risk sources that they might encounter in scenarios of severe change in the macroeconomic situation and assessing their resilience to such events. By testing themselves, or the financial system as a whole, beyond normal operational capacity, they can quantify vulnerabilities. In addition, the stability of the system or entity can be studied and pursued more easily (Vazquez, Tabak and Souto, 2012).

To design and apply a stress test, many important assumptions should be made. The first step must be to identify the specific risk and vulnerability of concern. In the literature regarding the stress testing of banking risks, the most common type of risks considered are credit, market and liquidity. The majority have focused on assessing credit risk, since this is a bank’s most important risk component. However, liquidity stress testing is gaining in visibility and importance.

Although liquidity crises are not so frequent, their impact are high (low-frequency, high-impact events), especially due to their contagious effects

To continue reading...

You need to sign in to use this feature. If you don’t have a Risk.net account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here: