Introducing Funding Liquidity Risk in a Macro Stress-Testing Framework

Céline Gauthier, Moez Souissi and Xuezhi Liu
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Céline Gauthier: Bank of Canada
Moez Souissi: International Monetary Fund

International Journal of Central Banking, 2014, vol. 10, issue 4, 105-142

Abstract: The main contribution of this paper is to introduce a funding liquidity component `a la Morris and Shin (2009) in a stresstesting framework. As a result, funding liquidity risk arises as an endogenous outcome of the interactions between market liquidity and solvency risks, and banks’ liquidity profiles. We perform a calibration exercise that highlights the vulnerability of leveraged institutions to the combination of low cash holdings and the prevalence of short-term debt, a key feature of the 2008 credit crisis. We also analyze the trade-offs between higher capital ratios, more liquid assets, and/or less short-term liabilities in reducing systemic risk.

JEL-codes: C72 E58 G01 G21 G28 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (11)

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