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

Emilio Hellmers, Jérôme Henry and Arianna Pilar Santone

No 31, ESRB Occasional Paper Series from European Systemic Risk Board

Abstract: 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

Keywords: contagion; financial interconnectedness; financial stability; fire sales; liquidity stress testing; macroprudential policy; non-bank financial intermediaries; stress testing; system-wide liquidity stress testing; systemic liquidity risk (search for similar items in EconPapers)
Date: 2026-09
Note: 123711
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.esrb.europa.eu//pub/pdf/occasional/esrb.op31~8d9a0170f5.en.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:srk:srkops:202631

Access Statistics for this paper

More papers in ESRB Occasional Paper Series from European Systemic Risk Board 60640 Frankfurt am Main, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Official Publications ().