A Liquidity Shortfall Analysis Framework for the European Banking Sector

Oana-Maria Georgescu, Dimitrios Laliotis, Miha Leber and Javier Población
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Oana-Maria Georgescu: Directorate Macro-prudential Policy and Financial Stability, European Central Bank, Sonnemannstrasse 20, 60314 Frankfurt am Main, Germany
Dimitrios Laliotis: Directorate Macro-prudential Policy and Financial Stability, European Central Bank, Sonnemannstrasse 20, 60314 Frankfurt am Main, Germany
Miha Leber: Directorate Micro-prudential Supervision II, European Central Bank, Sonnemannstrasse 20, 60314 Frankfurt am Main, Germany
Javier Población: Directorate Macro-prudential Policy and Financial Stability, European Central Bank, Sonnemannstrasse 20, 60314 Frankfurt am Main, Germany

Mathematics, 2020, vol. 8, issue 5, 1-15

Abstract: This paper presents an analytical framework for the identification of vulnerabilities arising from the liquidity and funding profile of banks. It is composed of two pillars—estimation of liquidity needs and the counterbalancing capacity of the total liquid assets—that determine a liquidity surplus or shortfall and the drivers for a range of plausible scenarios. Granular bank-level data on the structure of liabilities, maturation profile, liquid assets quality composition, and asset encumbrance are used for that purpose, also taking into account associated commonality effects. A new liquidity metric is introduced—the distance to liquidity stress indicator (DLSI)—which measures the required stress factor for banks to become illiquid. The novelty of the approach (i.e., taking into account asset encumbrance to determine counterbalancing capacity) provides empirical evidence that asset encumbrance has a significant impact on a bank’s liquidity position, leading to the non-linear behavior of liquidity shortfalls, even in the case of linear stress factors.

Keywords: liquidity needs; systemic liquidity stress testing; total liquid assets; asset encumbrance; counterbalance capacity; liquidity shortfall; liquidity surplus (search for similar items in EconPapers)
JEL-codes: C (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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