Sudden stop of capital flows and the consequences for the banking sector and the real economy
Florian Neagu and
Irina Mihai ()
No 1591, Working Paper Series from European Central Bank
The paper develops a macro-prudential liquidity stress-testing tool in order to capture the possible consequences of a capital outflow (including a run of deposits). The tool includes a feedback from the banking sector to the real economy, incorporates a link between liquidity risk and solvency risk, and is tailored for emerging market features. The stress-testing tool aims to: (i) test the capacity of the banking sector to withstand the sudden stop of capital flows, and to gauge the consequences of the liquidity stress to the solvency ratio; (ii) quantify the liquidity deficit that a central bank should accommodate; (iii) assess the impact on credit supply when the sudden stop occurs; and (iv) support the implementation of an orderly disintermediation process. The macro-prudential tool is applied on the Romanian banking sector. JEL Classification: G21, F32
Keywords: banks; emerging markets; macro-prudential tool; stress-testing; systemic liquidity (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20131591
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