Liquidity Stress-Tester: Do Basel III and Unconventional Monetary Policy Work?

41 Pages Posted: 27 Oct 2011

Date Written: December 1, 2010

Abstract

This paper 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, endogenising 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.

Keywords: banking, financial stability, stress-tests, liquidity risk

JEL Classification: C15, E44, G21, G32

Suggested Citation

van den End, Jan Willem, Liquidity Stress-Tester: Do Basel III and Unconventional Monetary Policy Work? (December 1, 2010). De Nederlandsche Bank Working Paper No. 269, Available at SSRN: https://ssrn.com/abstract=1950146 or http://dx.doi.org/10.2139/ssrn.1950146

Jan Willem van den End (Contact Author)

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

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