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A Liquidity Shortfall Analysis Framework for the European Banking Sector

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  • Oana-Maria Georgescu

    (Directorate Macro-prudential Policy and Financial Stability, European Central Bank, Sonnemannstrasse 20, 60314 Frankfurt am Main, Germany
    This paper should not be reported as representing the views of the European Central Bank (ECB), International Monetary Fund (IMF) or Banco de España (BdE). The views expressed herein are those of the authors and should not be attributed to the ECB, the IMF, its Executive Board, or its management or BdE. We thank the anonymous referees. We also acknowledge the financial support of the Spanish Ministerio de Economía, Industria y Competitividad grant number ECO2017-89715-P (Javier Población). Any errors that remain are, however, entirely the authors’ own.)

  • Dimitrios Laliotis

    (Directorate Macro-prudential Policy and Financial Stability, European Central Bank, Sonnemannstrasse 20, 60314 Frankfurt am Main, Germany
    This work was fully concluded prior to joining the IMF while the author was with Directorate Macro-prudential Policy and Financial Stability, at the European Central Bank.
    This paper should not be reported as representing the views of the European Central Bank (ECB), International Monetary Fund (IMF) or Banco de España (BdE). The views expressed herein are those of the authors and should not be attributed to the ECB, the IMF, its Executive Board, or its management or BdE. We thank the anonymous referees. We also acknowledge the financial support of the Spanish Ministerio de Economía, Industria y Competitividad grant number ECO2017-89715-P (Javier Población). Any errors that remain are, however, entirely the authors’ own.
    The affiliations of some of the authors at the time of publication have changed, namely Dimitrios Laliotis (International Monetary Fund) and Javier Población (Banco de España).)

  • Miha Leber

    (Directorate Micro-prudential Supervision II, European Central Bank, Sonnemannstrasse 20, 60314 Frankfurt am Main, Germany
    This paper should not be reported as representing the views of the European Central Bank (ECB), International Monetary Fund (IMF) or Banco de España (BdE). The views expressed herein are those of the authors and should not be attributed to the ECB, the IMF, its Executive Board, or its management or BdE. We thank the anonymous referees. We also acknowledge the financial support of the Spanish Ministerio de Economía, Industria y Competitividad grant number ECO2017-89715-P (Javier Población). Any errors that remain are, however, entirely the authors’ own.)

  • Javier Población

    (Directorate Macro-prudential Policy and Financial Stability, European Central Bank, Sonnemannstrasse 20, 60314 Frankfurt am Main, Germany
    This paper should not be reported as representing the views of the European Central Bank (ECB), International Monetary Fund (IMF) or Banco de España (BdE). The views expressed herein are those of the authors and should not be attributed to the ECB, the IMF, its Executive Board, or its management or BdE. We thank the anonymous referees. We also acknowledge the financial support of the Spanish Ministerio de Economía, Industria y Competitividad grant number ECO2017-89715-P (Javier Población). Any errors that remain are, however, entirely the authors’ own.
    The affiliations of some of the authors at the time of publication have changed, namely Dimitrios Laliotis (International Monetary Fund) and Javier Población (Banco de España).)

Abstract

This paper presents an analytical framework for the identification of vulnerabilities arising from the liquidity and funding profile of banks. It is composed of two pillars—estimation of liquidity needs and the counterbalancing capacity of the total liquid assets—that determine a liquidity surplus or shortfall and the drivers for a range of plausible scenarios. Granular bank-level data on the structure of liabilities, maturation profile, liquid assets quality composition, and asset encumbrance are used for that purpose, also taking into account associated commonality effects. A new liquidity metric is introduced—the distance to liquidity stress indicator (DLSI)—which measures the required stress factor for banks to become illiquid. The novelty of the approach (i.e., taking into account asset encumbrance to determine counterbalancing capacity) provides empirical evidence that asset encumbrance has a significant impact on a bank’s liquidity position, leading to the non-linear behavior of liquidity shortfalls, even in the case of linear stress factors.

Suggested Citation

  • Oana-Maria Georgescu & Dimitrios Laliotis & Miha Leber & Javier Población, 2020. "A Liquidity Shortfall Analysis Framework for the European Banking Sector," Mathematics, MDPI, vol. 8(5), pages 1-15, May.
    • Handle: RePEc:gam:jmathe:v:8:y:2020:i:5:p:787-:d:357507
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    References listed on IDEAS

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    1. David Aikman & Piergiorgio Alessandri & Bruno Eklund & Prasanna Gai & Sujit Kapadia & Elizabeth Martin & Nada Mora & Gabriel Sterne & Matthew Willison, 2011. "Funding Liquidity Risk in a Quantitative Model of Systemic Stability," Central Banking, Analysis, and Economic Policies Book Series, in: Rodrigo Alfaro (ed.),Financial Stability, Monetary Policy, and Central Banking, edition 1, volume 15, chapter 12, pages 371-410, Central Bank of Chile.
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    5. Eric Wong & Cho-Hoi Hui, 2009. "A Liquidity Risk Stress-Testing Framework with Interaction between Market and Credit Risks," Working Papers 0906, Hong Kong Monetary Authority.
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