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Liquidity stress-tester: do Basel III and unconventional monetary policy work?

Jan Willem End ()

Applied Financial Economics, 2012, vol. 22, issue 15, 1233-1257

Abstract: This article presents a macro stress-testing model for liquidity risks of banks, incorporating the proposed Basel III liquidity regulation, unconventional monetary policy and credit supply effects. First and second round (feedback) effects of shocks are simulated by a Monte Carlo approach. Banks react according to the Basel III standards, endogenizing liquidity risk. The model shows how banks’ reactions interact with extended refinancing operations and asset purchases by the central bank. The results indicate that Basel III limits liquidity tail risk, in particular if it leads to a higher quality of liquid asset holdings. The flip side of increased bond holdings is that monetary policy conducted through asset purchases gets more influence on banks relative to refinancing operations.

Date: 2012
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Working Paper: Liquidity Stress-Tester: Do Basel III and Unconventional Monetary Policy Work? (2010) Downloads
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DOI: 10.1080/09603107.2011.646065

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