Perspective on Liquidity Stress Testing
About the Lecture
The lecture Perspective on Liquidity Stress Testing by Edu Pristine is from the course Archiv - Current Issues of FRM. It contains the following chapters:
- Banking Crisis in Iceland
- Leading to the Icelandic Debt Crisis
- Weighting of Shocks
- Stress Test Methods
- Management of Risks at Banks
- Questions
Author of lecture Perspective on Liquidity Stress Testing
Edu Pristine
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Excerpts from the accompanying material
... The banks had a low proportion of deposits in their funding and relied heavily on market funding for their operations, for which they were criticized by the Central Bank of Iceland. Consequently, banks diversified and at the end of 2007, deposits formed approx. 40% of their funding, up from 28% in 2006. Severe shocks hit the ...
... capital ratio was 10.1%. The central bank's stress tests suggested that the banks could withstand an increase in defaults that was expected in 2008. Banks also seemed to have sufficient liquid assets to cover its short-term liabilities. For example, Landsbanki's liquidity ...
... by the probability of recovery of short-term assets and liabilities are weighted by the probability of that short-term liabilities must be repaid. During periods of extreme stress, these weighting are unlikely to hold and stress tests reflect that. Weightings on liquid assets ...
... to cover liabilities. Stress tests combining FME and Sedlabanki shocks Liabilities are also shocked as per the rules of central bank. The exchange rate shock would also impact both foreign currency assets and liabilities. Short-term assets less the redemptions would show a surplus of 960 billion krona (74% of GDP). Liquid short-term assets less redemptions would show a surplus of 12 billion krona (1% ...
... crisis. Short-term funding dried up as the lenders refused to roll over the financing or make a new one. When actual shocks and freezing of deposit withdrawals are applied - Net short-term liquidity position remained in surplus of 776 billion krona (60% of ...
... should consider the most improbable and unthinkable scenarios including a run on deposits, problems in wholesale refinancing, or a shutdown of payment systems. Adopt a "stress test till it breaks" strategy. Focus should be on identifying a set of scenarios under which the system reaches a ...
