Stress-Testing a Shock to Remittances in a Post-COVID World – What Impact on Liquidity?

Posted: 30 Jul 2021

Date Written: June 1, 2020

Abstract

Remittances have historically been a stable source of funding which has played a key role in the development efforts of many nations worldwide. As a consequence of the Covid crisis and the lockdown measures imposed to counteract the spread of the disease, the World Bank estimated a drop of 20% in remittances by the end of 2020. To study the effect that such a conjuncture would have on the financial stability of developing economies, this paper develops a remittance stress test that investigates the impact of the projected shock on banking sector liquidity at a country level. The study encompasses 112 countries and finds that small, emerging economies with underdeveloped financial sectors suffer the most, with six of the ten most affected nations experiencing a drop in their liquid asset ratios that would place their banking sector at significant liquidity risk.

Keywords: remittances, stress test, liquidity risk, financial development, banking sector

JEL Classification: F24, F37, G21

Suggested Citation

Monahov, Alexandru, Stress-Testing a Shock to Remittances in a Post-COVID World – What Impact on Liquidity? (June 1, 2020). Available at SSRN: https://ssrn.com/abstract=3891375 or http://dx.doi.org/10.2139/ssrn.3891375

Alexandru Monahov (Contact Author)

National Bank of Moldova ( email )

Chisinau
Moldova

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