A view from the top: The interaction between solvency and liquidity stress

Claus Puhr and Stefan Schmitz

Journal of Risk Management in Financial Institutions, 2013, vol. 7, issue 1, 38-51

Abstract: In the context of stress testing, the interaction between solvency and liquidity stress has received too little attention in academic research as well as in practical application. This paper develops a number of interaction channels from solvency to liquidity and from liquidity to solvency. Thereby it draws on supervisory experience, case studies and the available theoretical literature. It then presents a conceptual framework to quantify the interaction by extending the Austrian central bank's framework for solvency and liquidity stress testing. In an empirical example based on the Austrian banking system the paper investigates the relative materiality of these channels. It uncovers two important trade-offs, one between quantitative impact of channels and the respective model risk/parameter uncertainty and another between conceptual quality and actionable output. The paper concludes that the importance of interaction between solvency and liquidity is too high to simply ignore and suggests approaches to model and to address the aforementioned trade-offs.

Keywords: solvency stress tests; liquidity stress tests; financial stability; macro-prudential supervision; bank supervision; feedback effects; second-round effects; financial crisis (search for similar items in EconPapers)
JEL-codes: E5 G2 (search for similar items in EconPapers)
Date: 2013
References: Add references at CitEc
Citations:

Downloads: (external link)
https://hstalks.com/article/379/download/ (application/pdf)
https://hstalks.com/article/379/ (text/html)
Requires a paid subscription for full access.

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:aza:rmfi00:y:2013:v:7:i:1:p:38-51

Access Statistics for this article

More articles in Journal of Risk Management in Financial Institutions from Henry Stewart Publications
Bibliographic data for series maintained by Henry Stewart Talks ().