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Sudden stop of capital flows and the consequences for the banking sector and the real economy

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  • Neagu, Florian
  • Mihai, Irina

Abstract

The paper develops a macro-prudential liquidity stress-testing tool in order to capture the possible consequences of a capital outflow (including a run of deposits). The tool includes a feedback from the banking sector to the real economy, incorporates a link between liquidity risk and solvency risk, and is tailored for emerging market features. The stress-testing tool aims to: (i) test the capacity of the banking sector to withstand the sudden stop of capital flows, and to gauge the consequences of the liquidity stress to the solvency ratio; (ii) quantify the liquidity deficit that a central bank should accommodate; (iii) assess the impact on credit supply when the sudden stop occurs; and (iv) support the implementation of an orderly disintermediation process. The macro-prudential tool is applied on the Romanian banking sector. JEL Classification: G21, F32

Suggested Citation

  • Neagu, Florian & Mihai, Irina, 2013. "Sudden stop of capital flows and the consequences for the banking sector and the real economy," Working Paper Series 1591, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20131591
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    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecbwp1591.pdf
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    References listed on IDEAS

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    6. Miss Liliana B Schumacher & Mr. Theodore M. Barnhill, 2011. "Modeling Correlated Systemic Liquidity and Solvency Risks in a Financial Environment with Incomplete Information," IMF Working Papers 2011/263, International Monetary Fund.
    7. Mr. Claus Puhr & Mr. Andre O Santos & Mr. Christian Schmieder & Salih N. Neftci & Mr. Benjamin Neudorfer & Mr. Stefan W. Schmitz & Mr. Heiko Hesse, 2012. "Next Generation System-Wide Liquidity Stress Testing," IMF Working Papers 2012/003, International Monetary Fund.
    8. Jan Willem van den End, 2012. "Liquidity stress-tester: do Basel III and unconventional monetary policy work?," Applied Financial Economics, Taylor & Francis Journals, vol. 22(15), pages 1233-1257, August.
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    Cited by:

    1. Konstantin Makrelov & Rob Davies & Laurence Harris, 2021. "The impact of capital flow reversal shocks in South Africa: a stock- and-flow-consistent analysis," International Review of Applied Economics, Taylor & Francis Journals, vol. 35(3-4), pages 475-501, July.

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    More about this item

    Keywords

    banks; emerging markets; macro-prudential tool; stress-testing; systemic liquidity;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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