Stress Testing of Liquidity Maturity Transformation Risk in Banks

Management Studies, July-Aug. 2018, Vol. 6, No. 4, 235-251, Davidpublishing doi: 10.17265/2328-2185/2018.04.001

17 Pages Posted: 17 Oct 2019

Date Written: July 17, 2018

Abstract

One of the main causes of the past crisis was the inability of financial institutions to acquire funding at appropriate costs. The importance of applying a good liquidity risk measurement system becomes apparent. The present paper provides an approach to the measurement of liquidity maturity transformation risk within a stress testing framework, for middle-sized banks. The costs of liquidity arising due to a downturn in refinancing conditions are calculated by using modern risk measures. The forward-looking way is based on a liquidity gap report, where the consideration of the counterbalancing capacity enables to gain an insight into the real liquidity needs. The measurement of both, the portfolio-value in the respective time bucket and liquidity costs, is possible. Applying the expected shortfall can easily be included into the calculation. The results show that by using historical simulation, if no sufficient data are available, expected shortfall delivers an approximate value. Still, it can serve as an indicator of insurance against extreme events. The present approach combines a scenario-based view to a possible distress with a quantitative risk measurement. Therewith, it contributes to the bank’s wide stress testing as required by the regulatory authorities.

Keywords: liquidity risk, stress testing, value at risk, expected shortfall, funding risk, banking, historical simulation, spread risk, regulatory requirements

JEL Classification: C14, C81, G17, G21, G28

Suggested Citation

Schmitt, Eugenia, Stress Testing of Liquidity Maturity Transformation Risk in Banks (July 17, 2018). Management Studies, July-Aug. 2018, Vol. 6, No. 4, 235-251, Davidpublishing doi: 10.17265/2328-2185/2018.04.001. Available at SSRN: https://ssrn.com/abstract=3466041

Eugenia Schmitt (Contact Author)

University of Applied Sciences ( email )

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