Macroprudential Liquidity Stress Test: How To Cope With Liquidity Drains

Florian Neagu and Irina Mihai ()
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Irina Mihai: National Bank of Romania, Bucharest University of Economic Studies

Journal for Economic Forecasting, 2022, issue 4, 96-111

Abstract: This paper develops a macroprudential liquidity stress-testing tool to seize possible consequences of a liquidity drain that manifests during a systemic crisis tailored to an emerging economy. The tool novelty resides in including feedback from the real economy also affected by a liquidity shock, quantifying the impact of the drop in the support from the banking group through foreign funding and the link between liquidity and solvency that matches emerging market features. The stress-testing tool aims to: (i) test the capacity of the banking sector to withstand liquidity drain and to gauge consequences to liquidity and solvency ratio, (ii) assess the impact on credit supply when the liquidity shock occurs, and (iii) evaluate some policy options, including liquidity deficit a central bank should accommodate. We apply the tool to the Romanian economy using two scenarios with different risk severity and discuss possible policy measures.

Keywords: banks; capital flows; systemic liquidity; stress-testing tool; policy measures; emerging markets (search for similar items in EconPapers)
JEL-codes: F32 G21 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:rjr:romjef:v::y:2022:i:4:p:96-111

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