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This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License
Article
Stress Testing of Liquidity Maturity Transformation Risk in Banks
Author(s)
Eugenia Schmitt
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DOI:10.17265/2328-2185/2018.04.001
Affiliation(s)
FinRiskConsult, Munich, Germany
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
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