A Liquidity Risk Stress-Testing Framework with Basel Liquidity Standards

A Stress Testing Framework for Liquidity Risk

One of the most important lessons learned from the recent financial crisis is that liquidity risk is fundamentally different from other forms of risk such as market risk and credit risk. Liquidity risk, viewed earlier as a second order risk, is now considered a major risk class. The crisis showed us how quickly a risk which starts as a market or credit risk transforms into a liquidity event and...

Strengthening Bank Management of Liquidity Risk: The Basel III Liquidity Standards

The global financial crisis highlighted the importance of ensuring that the financial system has adequate liquidity to withstand adverse circumstances. The funding pressures that began in 2007 underlined the acute deficiencies in the liquidity-risk-management practices of some banks, and the severity of the ensuing crisis required massive public sector support to stem the liquidity spiral and m...

A liquidity risk stress-testing framework with interaction between market and credit risks

A liquidity risk stress-testing framework with interaction between market and credit risks Eric Wong* and Cho-Hoi Hui* This version: April 11, 2011 Abstract This study develops a framework for stress testing banks’ liquidity risk, where liquidity and default risks can stem from market risk arising from asset price shocks. The risks are assumed to be transmitted through three channels. First, ba...

Optimizing Basel III Liquidity Coverage Ratios

Volume, liquidity, and liquidity risk ¬リニ

Many classes of microstructure models, as well as intuition, suggest that it should be easier to trade when markets are more active. In the data, however, volume and liquidity seem unrelated over time. This paper offers an explanation for this fact based on a simple frictionless model in which liquidity reflects the average risk-bearing capacity of the economy and volume reflects the changing c...