Modelling systemic liquidity risk with feedback effects in the UK banking sector

Gary Van Vuuren

Journal of Risk Management in Financial Institutions, 2011, vol. 5, issue 1, 36-59

Abstract: A liquidity risk stress-testing model which has been tested in the Dutch market and which considers feedback shocks induced by market participants is adapted and calibrated for generic use and then applied to UK bank data. Because the model is flexible and adaptable, it permits the robust investigation of different bank reactions to stressed market conditions, including buffer restoration, leverage targeting, the effect of severely stressed haircuts and systemic risk increases (through reputation degradation and enhanced contagion by other banks). Buffer losses owing to second-round effects are explored through reactions stemming from culprit and victim banks.

Keywords: liquidity risk; systemic risk; stress testing; Monte Carlo; C134; C16; C53 (search for similar items in EconPapers)
JEL-codes: E5 G2 (search for similar items in EconPapers)
Date: 2011
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Persistent link: https://EconPapers.repec.org/RePEc:aza:rmfi00:y:2011:v:5:i:1:p:36-59

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