The European Central Bank (ECB) has launched a sensitivity analysis of liquidity risk to assess the ability of the banks it directly supervises to handle idiosyncratic liquidity shocks. The exercise will constitute the supervisory stress test of 2019. The results of the exercise will feed into the ECB’s ongoing supervisory assessments of banks’ liquidity risk management frameworks, including the Supervisory Review and Evaluation Process (SREP). However, the outcome of the stress test will not affect supervisory capital and liquidity requirements in a mechanical way.
ECB Banking Supervision will test adverse and extreme hypothetical shocks in which banks face increasing liquidity outflows. The exercise will focus on banks’ expected short-term cash flows to calculate the “survival period”, which is the number of days that a bank can continue to operate using available cash and collateral with no access to funding markets.
Potential impact of idiosyncratic liquidity shocks on individual banks
The sensitivity analysis, which is expected to be completed in four months, will focus solely on the potential impact of idiosyncratic liquidity shocks on individual banks. It will not assess the potential causes of these shocks or the impact of wider market turbulence. The exercise will be carried out without any reference to monetary policy decisions.
The results will inform the supervisor about the relative vulnerability of banks to different liquidity shocks applied in the exercise and will also identify improvements needed in banks’ liquidity risk management.
Source: https://www.bankingsupervision.europa.eu/
