Study on Commercial Banks’ Liquidity Risk Stress Testing under Macroeconomic Shocks
|Keywords||Commercial Bank Macroeconomic Senario Model Liquidity Risk Cash Flow Gap Stress Testing|
The spread of the global financial crisis triggered by the U.S. Subprime Crisis inthe end of2008, has led a huge loss to the world’s economy. In this crisis, a largenumber of financial institutions have gone bankrupt due to liquidity continuing andhuge loss. It also re-attracted the attention of experts and practitioners on this field toturn to the liquidity risk management.As a result risk, the liquidity risk not only has its independent occurrencemechanism, it may also be caused by other kinds of risks. Therefore its measurementand evaluation is very difficult. Most existing researches use static indexes as themeasure of liquidity risk, such as loan-to-deposit ratio index and reserve ratio index.In the studies on macro stress testing of liquidity risk, they are rarely considering thesustainable impact on liquidity induced by the internal adjustment of macroeconomicsystem for several periods after severe shocks. Therefore, this article attempts to builda macro stress testing model for bank’s liquidity risks which is considering theinteractions among several macro risk indicators and using the liquidity dynamicindicator as the measure of bank liquidity. In this model we transmit the extremeimpact from macro economy to the bank’s cash flow not only by itself but alsothrough the connection of the liquidity risk and other kinds of risks, such as credit riskand market risk. Then we use this model to stress testing the liquidity risk of severalbanks in China.In this paper, we use quarterly data to do the research. First, we select multiplemacroeconomic indicators to build a vector autoregression model (VAR), which isused to simulate the internal adjustment of macroeconomic volatility. Then we takethe macroeconomic data of China to estimate the macroeconomic interaction model.After that, we choose the cash flow gap as the measure of bank’s liquidity risk andbuild the transmitting model through three channels of default of maturity assets,reputation and the depreciation of assets, with the middle indexes of assets’probability of default (PD)、bank’s probability of deposit(BDP)、deposit loss rate(DOR)、interbank debts loss rate(IOR) and prices of securities and et al. Then we takeseveral banks in China as examples to estimate the transmitting model, and find thatthe middle indexes are rather sensitive to the volatility of macroeconomic factors.Based on the built models, we take the chosen banks to do four periods liquidity risk macro stress testing under initial shocks respectively with a sharp drop of GDPgrowth and a substantial increase of one-year lending rate caused by these twoscenarios. It aims to study the instantaneous and sustainable influences to bank’sliquidity risk. The result shows that in current period of these two types of situations,the subject banks will have significant cash flow losses. Although the macroeconomicintrinsic regulator can ease the loss of cash flow situation of the commercial banks inthe subsequent calculation of the period, but not in a short term (the net outflow ofcash flow of the banks curb within four periods or one year). Based on the analysis,we propose some suggestions on liquidity risk management of banks andmacroeconomic policy making.