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© 2022 International Monetary Fund
WP/22/252
IMF Working Paper
Monetary and Capital Market Department
Systemwide Liquidity Stress Testing Tool
Prepared by Hiroko Oura*
Authorized for distribution by May Khamis
December 2022
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
ABSTRACT: Developing a systemic liquidity stress testing tool is challenging due to data constraints and hard-to-model behavioral factors. There has yet to be a uniformly accepted model partly because the nature of systemic liquidity risks differs significantly across countries. This paper offers a simple Excel-based tool to assess the high-level impact of aggregate liquidity stress on the whole economy and gauge its spillover across banks, non-bank financial institutions (NBFIs), and non-financial economic sectors. It primarily uses the balance sheet approach (BSA) data—a sector-aggregate matrix of financial exposure by counterpart—that have become increasingly available for various economies with all income levels. The results can identify systemically important financial linkages to be analyzed further and help calibrate macroprudential measures and a liquidity support framework. When liquidity stress stems from capital outflows, the tool can enrich policy discussion based on integrated policy framework (IPF) and international reserve adequacy perspectives.
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| JEL Classification Numbers: | E44, E58, F3, G18, G28 |
| Keywords: | Systemic liquidity, NBFIs, stress test, integrated policy framework, capital flow, international reserve adequacy, interconnectedness, balance sheet approach, macroprudential policy, financial stability |
| Author’s E-Mail Address: | houra@imf.org |
| JEL Classification Numbers: | E44, E58, F3, G18, G28 |
| Keywords: | Systemic liquidity, NBFIs, stress test, integrated policy framework, capital flow, international reserve adequacy, interconnectedness, balance sheet approach, macroprudential policy, financial stability |
| Author’s E-Mail Address: | houra@imf.org |
Contents
Glossary
Executive Summary
Introduction
Background
Contribution of This Paper
Assessing Systemwide Liquidity Risks: Conceptual Framework
Illustrative Example
Identifying Systemically Important Sectors and Linkages
Sectoral Balance Sheet
Stress Testing Design and Scenario
Additional Stress Testing Parameters
Results and Interpretation
Policy Discussion
Conclusion
Annex I. Selected FX Liquidity Support Measures during the Global Financial Crisis
References
Boxes
1. Why are BOP Shocks and Foreign Liquidity Special in Systemwide Liquidity Analysis?
2. Liquid Asset Buffer Structure and Contagion Effects
3. Structure of HQLA and Reserve Requirements
Figures
1. Cashflow Liquidity Stress Test
2. Domestic Propagation of Balance-of-Payment Shocks
3. Financial Linkage: Hypothetical System
4. International Investment Position: Hypothetical System
5. FX Reserve Deposits and International Reserves: Hypothetical System
6. Results—Impact on Bank and the Central Bank FX Liquidity Buffers
7. Sectoral Distribution of FX Liquidity and Liability
8. Results—Sensitivity Test for alternative bank loan rollover rate assumptions1
9. Central Bank Liquidity Provision under the Currency Board Regime
Tables
1. Balance Sheet Approach Matrices
2. Non-Financial Corporate Balance Sheet
3. Domestic Bank Balance Sheet
4. Central Bank Balance Sheet
5. Stress Testing Parameters and their Calibration
6. Stress Testing Parameter Assumptions Used in the Example
Glossary
| ABM | Agent Based Model |
| AE | Advanced Economy |
| ARA | Assessing Reserve Adequacy |
| BOP | Balance of Payment |
| BSA | Balance Sheet Approach |
| CCyB | Countercyclical Capital Buffer |
| CFM | Capital Flow Management |
| CCP | Central clearing parties |
| CP | Commercial paper |
| DGI | Data gap initiative |
| ECB | European Central Bank |
| ELA | Emerging Liquidity Assistance |
| EM | Emerging market |
| EMDE | Emerging Market and Developing Economies |
| FDI | Foreign Direct Investment |
| FMI | Financial Market Intermediary |
| FSAP | Financial Stability Assessment Program |
| FX | Foreign Exchange |
| GFC | Global Financial Crisis |
| GIR | Global Institutional Reserves |
| HQLA | High-Quality Liquid Assets |
| ICAAP | Internal Capital Adequacy Assessment Process |
| IF | Investment fund |
| IMF | International Monetary Fund |
| IPF | Integrated Policy Framework |
| IV | Institutional View |
| LC | Local Currency |
| LCR | Liquidity Coverage Ratio |
| LOLR | Leader of Last Resort |
| NBFI | Non-Bank Financial Institution |
| NFC | Non-Financial Corporate |
| NSFR | Net Stable Funding Ratio |
| NIR | Net International Reserves |
| RR | Required reserve |
| SDDS | Special Data Dissemination Standard |
| SRB | Systemic Risk Buffers |
“The author(s) would like to thank” footnote, as applicable.
“The author would like to thank MCM colleagues—especially Martin Cihak, Xiaodan Ding, Kelly Eckhold, Pierpaolo Grippa, Marco Gross, Vikram Haksar, Darryl King, Dimitrios Laliotis, Mindaugas Leika, Caterina Lepore, Elisa Letizia, Srobona Mitra, Dulani Seneviratne and Mariano Spector (alphabetical order)—and national authorities of Indonesia, the Philippines, Turkey, Uganda, United Arab Emirates for their helpful feedbacks to earlier version of the paper.