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A Framework for Systemwide Liquidity Analysis
Author:
Xiaodan Ding
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Dimitrios Laliotis https://isni.org/isni/0000000404811396 International Monetary Fund

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Priscilla Toffano
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Series:
IMF Working Papers
Volume/Issue:
Volume 2024: Issue 104
Language:
English
Publication Date:
17 May 2024
DOI:
https://doi.org/10.5089/9798400277078.001
ISBN:
9798400277078
ISSN:
1018-5941
Pages:
51
Keywords:
Systemwide liquidity analysis; liquidity at risk; nonbank financial institution; liquidity stress testing; haircut; asset encumberance; margin calls; repurchase agreement; fire-sales; derivative positions; liquidity analysis; liquidity shock; liquidity stress; net liquidity position; liquidity needs; liquidity constraint; Liquidity; Commercial banks; Mutual funds; Securities; Liquidity risk; Global
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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.
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We developed a novel Systemwide Liquidity (SWL) framework to identify liquidity stress in the system that goes beyond banks and to assess the role played by non-bank financial institutions (NBFIs) in episodes of liquidity stress. The framework, which complements standard liquidity and interconnectedness analyses, traces the flow of liquidity among various agents in the economy and explores possible transmission channels and amplification mechanisms of correlated liquidity shocks. The framework uses unique balance sheet and asset encumbrance data to demonstrate the importance of assessing liquidity at the system level by allowing for (i) analyses of each agent’s contribution to liquidity stress, (ii) analyses of the impact of different behavioral assumptions (e.g., pecking order of collateral utilization, negative externalities of fire-sales and margin positions), and (iii) policy simulations. Since this framework covers a comprehensive set of financial instruments and transactions, it paves the way for harmonization of systemwide liquidity analysis across countries. We applied this general framework to Mexico in the context of the FSAP. Results for Mexico show that commercial banks safeguard the resiliency of the financial system by backstopping the liquidity needs of other agents. Moreover, certain sectors appear more vulnerable when binding regulatory liquidity constraints trigger risk-averse behavioral responses.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund