## wp17102 ## Source details **Canonical URL:** [wp17102](https://www.imf.org/-/media/files/publications/wp/2017/wp17102.pdf) ## Other formats - [Markdown version](/-/media/files/publications/wp/2017/wp17102.pdf.md) - [Structured JSON version](/-/media/files/publications/wp/2017/wp17102.pdf.json) --- ### I. Introduction — scope and purpose - Provides a conceptual overview of liquidity stress testing approaches developed by IMF staff and surveys their application within the Financial Sector Assessment Program (FSAP). - Companion to Jobst, Ong and Schmieder (2013) on bank solvency stress testing and complements an internal “Guidance Note” on liquidity stress testing for IMF staff (Catalán, 2015). - Sample and coverage: - Considers FSAPs undertaken in 34 jurisdictions that completed an FSAP between September 2010 and December 2016. - Sample comprises (i) 29 countries identified by the IMF as having systemically important financial systems (“S-29”), and (ii) five other G-20 members not among the S-29. - Excludes three of these 34 countries (European Union, Luxembourg and Mexico) because liquidity stress tests were not part of their FSAPs. ### II. Key developments and objectives of IMF liquidity stress testing - Staff developments and directions: - Take stock of liquidity risk management practices and improve liquidity stress tests by addressing design gaps. - Develop methods to identify systemic liquidity risk and build models linking liquidity and solvency risks. - Objectives in FSAPs: - Assess whether banks’ internal liquidity buffers suffice under adverse shocks. - Inform potential need for emergency liquidity assistance to viable banks. - Evaluate external liquidity support from parent banks, noting cross-border limitations and ring-fencing constraints. ### III. Conceptualization of liquidity risk — definitions and dynamics - Two broad, mutually reinforcing types of liquidity risk: - Funding liquidity risk: inability to meet cash flow needs because of liability run-offs, contingent obligations, maturity mismatches, and impaired access to unsecured funding markets. - Market liquidity risk: inability to buy/sell sizeable volumes of securities at low cost with limited price impact (volume measures and price-based measures such as bid-ask spreads). - Market liquidity considerations in stress tests: - Mark-to-market valuation changes for trading or AfS securities and extraordinary impairment losses for HtM assets. - Asset value declines and collateral haircuts affect cash flow severity; some eligible collateral may be repo-ed with the central bank in systemic crises. - Reinforcing dynamics: - Market illiquidity can evolve into funding illiquidity and vice versa (e.g., swap market drying up in late-2007 for European banks seeking U.S. dollar funding). - Common liquidity risk indicators include: - Share of non-core funding (short-term, wholesale, foreign exchange) in total liabilities. - Detailed decomposition of assets and liabilities, e.g., share of HQLAs in total assets. - FX swap basis, gross open foreign currency position, LIBOR-OIS spread, valuation haircuts on collateral for SFTs. ### IV. Regulatory initiatives and Basel III metrics - BCBS initiatives summarized: - Transposed basic principles into Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR). - Issued guidance on liquidity risk management, intraday indicators, and stress testing practices. - Liquidity Coverage Ratio (LCR): - Purpose: promote short-term resilience by requiring HQLAs to cover net outflows in a stressed 30-day scenario. - Definition: potential funding shortfall = cash outflows less cash inflows (subject to a cap of 75 percent of total expected cash outflows). - Interpretation: A LCR value of less than 100 percent indicates a liquidity shortfall. - January 2013 changes: Level 2B asset inclusions and haircuts; changed run-off and draw-down rates; zero percent run-off for central bank ops; other detailed adjustments. - Net Stable Funding Ratio (NSFR): - Purpose: limit unstable funding by encouraging longer-term borrowing over a one-year horizon. - Interpretation: A value of less than 100 percent indicates a shortfall in stable funding. - Observation/implementation: subject to an observation period with a review clause prior to implementation date of January 1, 2018. - Transition numbers (selected from Appendix Table 2): - Note on LCR introduction: introduced 1 January 2015 with minimum requirement beginning at 60 percent, rising in equal annual steps of 10 percentage points to reach 100 percent on January 1, 2019. - Minimum Common Equity Capital Ratio by year: - 2011: 3.50 - 2012: 4.00 - 2013: 4.50 - 2014: 4.50 - 2015: 4.50 - 2016: 4.50 - 2017: 4.50 - Capital Conservation Buffer progression: - 2014: 0.625 - 2015: 1.25 - 2016: 1.875 - 2017: 2.50 - Minimum Common Equity + Capital Conservation Buffer progression (selected): - 2011: 3.50 - 2012: 4.00 - 2013: 4.50 - 2014: 5.125 - 2015: 5.75 - 2016: 6.375 - 2017: 7.00 - Minimum Tier 1 Capital progression: - 2011: 4.50 - 2012: 5.50 - 2013: 6.00 - 2014: 6.00 - 2015: 6.00 - 2016: 6.00 - 2017: 6.00 - Minimum Total Capital: - 2011–2017: 8.00 - Minimum Total Capital + Capital Conservation Buffer progression (selected): - 2014: 8.625 - 2015: 9.25 - 2016: 9.875 - 2017: 10.50 - LCR minimum standard introduction steps listed as: 60, 70, 80, 90, 100 - NSFR: observation period begins; supervisory monitoring; parallel run January 2012 - January 2017; disclosure starts in January 2015. ### V. FSAP liquidity stress testing framework — scope, data, coverage, and methods - Approaches and coverage: - Top-down (TD) tests conducted by authorities with IMF input, jointly, or independently; Bottom-up (BU) tests increasingly used with banks providing granular data. - Coverage considerations: typically systemically important banks by solvency; some FSAPs covered entire banking sector (e.g., Brazil, Denmark, Switzerland). - Between September 2010 and December 2016, nine of the 29 FSAPs that incorporated liquidity stress tests (with detailed public information) included nearly all banks; more than 80 percent of system assets were covered in eight other cases (Australia, Belgium, Canada, China, Denmark, France, India, and Turkey). - Data and reporting basis: - TD data typically confidential prudential supervisory liquidity reporting with maturity and currency breakdowns; examples: Australia, Austria, Brazil, Germany, Hong Kong SAR, Korea, Poland, Spain, Sweden, Turkey, the United Kingdom. - BU tests require assessment of internal controls and governance; examples: Belgium, China, Denmark, France, India, Japan, Korea, Singapore and South Africa. - Ideal data cut-off date: coincides with parallel solvency stress test cut-off for feedback consistency. - Consolidation: mostly consolidated banking groups; solo/legal entity tests used where relevant (examples: Germany, Ireland, South Africa, United Kingdom); some both solo and consolidated (Belgium, Hong Kong SAR, Singapore). - Methodologies applied: - Implied cash flow (ICF) approach (cumulative/non-cumulative) over 5/30 days to capture run-off, drawdowns, asset sales subject to haircuts. - Asset-liability mismatch analysis over multiple maturity buckets (with/without rollover restrictions). - Basel III liquidity measures (LCR and NSFR), often approximated. - Deterministic ICF and cash flow tests common; stochastic/market-based models used for sophisticated systems; macro-financial econometric models less common. - Framework elements summarized (scope, scenarios, methodology, output): - Risk horizon conventions: one or five working days (one week) and/or one month; NSFR-like assessments over one year. - Benchmarks/outputs: positive net cash inflow, LCR, NSFR, and national liquidity measures. ### VI. Scenario design, calibration, and challenges - Scenario design components: - Definition of scenarios (scope, severity), exogenous stress assumptions, and pass/fail benchmarks. - Tests include cash flow mismatch analyses over different horizons, ratio-based analyses, reverse stress tests, and traditional projections. - Calibration and conventions: - Deterministic stress tests intended to be “extreme yet plausible.” - ICF tests and standard measures include pre-defined assumptions and sensitivity analysis; other deterministic tests use historical worst-case scenarios, expert judgment or statistical models. - Key challenges: - Liquidity crises driven by psychological/confidence effects that are idiosyncratic and hard to model. - Limited availability of granular data (asset encumbrance, collateral details, repos/reverse repos) and confidentiality constraints. - Common policy measures considered within tests: - Liquidity buffer requirements; stable funding requirements; liquidity charges on non-core funding; reserve requirements with central bank; restrictions on open FX positions and FX-denominated funding. - Link to solvency: - Changes in funding costs during stress can be linked to capital adequacy; funding cost elasticity is non-linear and may differ across tenors and funding types. - Feedback/second-round effects between liquidity and solvency are important but operational implementation is still nascent. ### VII. Implied Cash Flow (ICF) tool — structure, assumptions, and example parameters - Purpose and horizons: - ICF models sudden withdrawals and captures market liquidity risk, funding liquidity risk, and utilization of contingent claims over five-day (cumulative) and 30-day (non-cumulative) horizons. - Liquidity scope and core assumptions: - Only unencumbered liquid assets (except cash/cash-equivalents) included. - New unsecured financing and securitization impossible within the time horizon. - No renewal of term retail and wholesale deposits; full renewal of secured retail lending assumed. - Central bank eligible collateral can be monetized at appropriate haircuts; repo markets are open at appropriate haircuts. - Limited potential unsecured support in convertible currencies from related and third parties; full convertibility between currencies (within one week). - Haircuts and example parameter ranges (preserve exact brackets): - 5-day cumulative liquid assets haircuts: - cash and cash balances with central banks [haircut: 0 percent] - securities and bank loans eligible at major central banks [0-15] - securities and bank loans mobilizable in repo transactions [5-30] - marketable securities [10-35] - 30-day non-cumulative liquid assets haircuts: - cash and cash balances with central banks [0] - securities and bank loans eligible at major central banks [0-20] - securities and bank loans mobilizable in repo transactions [10-60] - marketable securities [20-70] - Example behavioral/calibration rates (preserve exact figures shown): - 5-day cumulative cash inflows: - expected cash inflows related to credit extension without liquid collateral [call-back rate: 20 percent per day] - expected inflows from maturing transactions with liquid securities [20] - potential inflows from committed/uncommitted credit lines to related and third parties [5/3] - 5-day cumulative cash outflows: - maturing and non-maturity funding without liquid collateral [discount factor: 5 percent per day] (sovereign and public sector clients [0]) - expected outflows related to reverse repo and securities borrowing [20] - maturing outflows to related parties [20] - committed/uncommitted contingent claims to related and third parties [5] - net cash flows related to derivatives (excl. credit derivatives) [20] 1/ - 30-day non-cumulative cash inflows and outflows include call-back and maturity rates of 100, and other parameters such as [23/12], [10-75 percent], [100], [23], and net derivatives cash flows [100] 1/ - Example test outcomes (preserve exact numbers and formatting): - Test 1a: Implied Cash Flow Test (5 Days) - Day 1: Cumulative loss of unsecured funding (up to 1 week) (percent) = 5.2; Cumulative loss of secured funding (up to 1 week) (percent) = 5.4; Minimum number of days of survival = 10000 - Day 2: Cumulative loss of unsecured funding (percent) = 10.6; Cumulative loss of secured funding (percent) = 10.2; Minimum number of days of survival = 20000 - Day 3: Cumulative loss of unsecured funding (percent) = 16.4; Cumulative loss of secured funding (percent) = 14.5; Minimum number of days of survival = 30000 - Day 4: Cumulative loss of unsecured funding (percent) = 22.4; Cumulative loss of secured funding (percent) = 18.5; Minimum number of days of survival = 40000 - Day 5: Cumulative loss of unsecured funding (percent) = 31.5; Cumulative loss of secured funding (percent) = 24.3; Minimum number of days of survival = 50000 - Test 1b: Implied Cash Flow Test (30 Days) - 30 Days: Cumulative loss of unsecured funding (percent) = 27.5; Cumulative loss of secured funding (percent) = 100.0; Survival = No; Banks illiquid (number) = 00; Banks illiquid (percent of banking system assets) = 0.0; Net cash shortfall relative to total liquid assets (percent) = 0.0; Net cash shortfall relative to total assets (percent) = 0.0 - Reporting template example fields and selected exact values: - t0: Cumulative loss of all unsecured funding (In percent) = 0.0; Cumulative loss of all secured funding (In percent) = 0.0; Minimum number of days of survival = 0; No. of banks illiquid = 0; Percent of banks illiquid (In percent) = 0.0; Net cash shortfall relative to total liquid assets (In percent) = 0.0; Net cash shortfall relative to total assets (In percent) = 0.0 - Day 1: Cumulative loss of all unsecured funding (In percent) = 1.9; Cumulative loss of all secured funding (In percent) = 16.1; Minimum number of days of survival = 100.0; No. of banks illiquid = 0; Percent of banks illiquid (In percent) = 0.0; Net cash shortfall relative to total liquid assets (In percent) = 0.0; Net cash shortfall relative to total assets (In percent) = 0.0 - Day 2: Cumulative loss of all unsecured funding (In percent) = 3.7; Cumulative loss of all secured funding (In percent) = 29.0; Minimum number of days of survival = 2165; No. of banks illiquid = 9; Percent of banks illiquid (In percent) = 3; Net cash shortfall relative to total liquid assets (In percent) = -4.9; Net cash shortfall relative to total assets (In percent) = -0.6; Weighted avg. capital adequacy ratio of failing banks (In percent) = 6.7; Weighted avg. Tier 1 capital ratio of failing banks (In percent) = 7.8; Weighted avg. CET1 capital ratio of failing banks (In percent) = 9.0 - Day 3: Cumulative loss of all unsecured funding (In percent) = 5.4; Cumulative loss of all secured funding (In percent) = 39.4; Minimum number of days of survival = 3271; No. of banks illiquid = 10; Percent of banks illiquid (In percent) = 0.0; Net cash shortfall relative to total liquid assets (In percent) = -36.2; Net cash shortfall relative to total assets (In percent) = -4.3; Weighted avg. capital adequacy ratio of failing banks (In percent) = 12.2; Weighted avg. Tier 1 capital ratio of failing banks (In percent) = 14.2; Weighted avg. CET1 capital ratio of failing banks (In percent) = 16.2 - Example aggregate outputs include Number of Banks failing the test = 27/198; Liquidity Shortfall = -3,210,916 / -2,367,750 / -843,166; Liquidity Shortfall (In % of total assets) = -10.6 / -11.6 / -8.6; Liquidity Shortfall (In % of liquid assets) = -89.8 / -98.9 / -71.4 - Top 10% shortfall (abs) examples: -340,617; -421,583; -674,975; -852,080; -518,143; -403,517; -138,346; -100,426 - Percent of Liquid Assets examples: 74.9; 72.2; 81.5; 95.4; 153.0; 84.9 - Number examples: 34; 67; 43; 27 ### VIII. Interaction and integration of solvency and liquidity risks - Rationale: - Integrated macroprudential stress tests should incorporate negative feedback loops between solvency and liquidity to assess systemic risk and banks’ susceptibility to solvency-induced liquidity stress. - Evidence and frameworks: - Empirical evidence suggests solvency and liquidity stress tests that ignore interactions substantially underestimate risk exposure (Puhr and Schmitz, 2014). - Practical implementation remains at an early stage; literature and model approaches cited include Van den End (2008), Aikman and others (2009), Wong and Hui (2009), Barnhill and Schumacher (2011), Schmieder and others (2012), Jobst (2014), and Bank of Canada frameworks. - Operational links used in recent FSAPs: - Some FSAPs estimate impact of shocks to balance sheets through cost of funding of short-term debt and maturing long-term debt with a lag (examples: Brazil, Germany, Spain, United Kingdom). ### IX. Communication, publication, and caveats - Presentation objectives and templates: - Main objective: draw attention of bank management, supervisors and regulators to potential risks and galvanize action. - Aggregated, granular presentations recommended: peer groups, dispersion measures, number of banks failing, percent of total sample assets failing, and detailed assumptions. - Findings support FSAP stability risk assessments and policy discussions on mitigation and crisis preparedness. - Publication practices and sensitivities: - Publication should balance completeness with avoiding complacency or undue alarm; prudential-data-based disclosure is sensitive. - Objectives, definitions, assumptions, methods and limitations detailed in Technical Notes and/or supplementary FSSA information; publication voluntary for authorities. - Mandatory summaries presented in the FSSA in standard STeM framework to improve transparency; aggregated system-wide results almost always disclosed. - Publication record in sample: all jurisdictions in sample (30) authorized publication of at least main results and general framework information; nineteen (19) authorized full publication of Technical Notes containing all details. - Caveats and interpretation: - Aggregating institution-level liquidity measures may not capture system-wide risks, herding behavior, or joint sensitivities. - Tests typically do not assume central bank LOLR support explicitly; results are static snapshots and may become quickly outdated. - Results require qualification by mitigating considerations (deposit reallocation, contractual inflows, central bank support, deposit insurance schemes). ### X. Advantages, weaknesses, and outlook - Cash flow–based tests (advantages): - Forward-looking; incorporate contractual cash flows, counterbalancing capacity, asset encumbrance, and off-balance sheet activities. - Better suited for capturing cumulative cash flows and granular maturity buckets and currencies than stock approaches like LCR. - Weaknesses: - High data intensity and initial set-up costs; key prerequisite is access to wide-ranging contractual cash flow and behavioral data. - Regulatory liquidity ratios are often stock-based with less granularity. - Outlook: - Future stress testing likely multi-pronged with a shift toward comprehensive cash flow-based tests and deeper integration of solvency-liquidity interactions. - Work by the BCBS Research Task Force on liquidity stress testing could provide useful insights into solvency-liquidity interactions. *Source: IMF working paper wp17102 (References and selected sections of the paper).* ### References ............................................................................................................. ### References ### I. Introduction — Context and Purpose - The global financial crisis (GFC) revealed widespread dislocations in funding markets and weaknesses in banks’ liquidity profiles, notably increased reliance on short-term wholesale funding and high leverage (IMF, 2008, 2010a, and 2011a). - Post-crisis policy response expanded the regulatory perimeter to improve management of funding maturity and currency mismatches. - This paper: - Provides a conceptual overview of liquidity stress testing approaches developed by IMF staff. - Surveys their application in assessing system-wide vulnerabilities to market and funding liquidity risks within the Financial Sector Assessment Program (FSAP), focusing on countries with systemically important financial sectors. - Is a companion to Jobst, Ong and Schmieder (2013) on bank solvency stress testing. - Complements an internal “Guidance Note” on liquidity stress testing for IMF staff (Catalán, 2015). - Scope of review: - Considers the most recent FSAPs undertaken in 34 jurisdictions that completed an FSAP between September 2010 and December 2016. - Sample comprises (i) 29 countries identified by the IMF as having systemically important financial systems (“S-29”), and (ii) five other G-20 members not among the S-29. - Excludes three of these 34 countries (European Union, Luxembourg and Mexico) because liquidity stress tests were not part of their FSAPs. ### II. Key Developments and Objectives of IMF Liquidity Stress Testing - Developments by IMF staff in FSAP context: - Take stock of liquidity risk management practices (e.g., IMF, 2010a and 2011a). - Improve liquidity stress tests by addressing design gaps (e.g., Ong and Čihák, 2010; Schmieder and others, 2012; Schmitz, 2015). - Develop methods to identify systemic liquidity risk (e.g., IMF, 2011a; Jobst, 2014). - Build models linking liquidity and solvency risks (e.g., BCBS, 2013b and 2015). - Objectives of liquidity stress tests in FSAPs: - Assess whether banks’ internal liquidity buffers suffice to withstand adverse shocks. - Inform potential need for emergency liquidity assistance to viable banks. - Evaluate external liquidity support from parent banks, noting cross-border limitations and ring-fencing constraints. ### III. Heterogeneity and Determinants of Liquidity Stress Tests in FSAPs - Liquidity stress tests in FSAPs are more heterogeneous than solvency stress tests due to: - Unique features of each financial system requiring qualitative judgment. - Availability and quality of data influencing method choice. - Extent of collaboration with authorities and individual banks. - Structure of the paper’s coverage: - Rationale and conceptual underpinnings of liquidity stress testing, including regulatory framework and challenges. - A framework for macroprudential liquidity stress testing introducing a taxonomy of main building blocks: scope, data requirements, methodology, final output. - Review of parameters adopted in past FSAPs for systemically important financial systems via a Stress Testing Matrix (STeM). - Publicly available information to help authorities prepare for FSAPs and to aid development of stress testing frameworks. ### IV. Regulatory Initiatives on Liquidity Risk (Summary) - Basel Committee on Banking Supervision (BCBS) initiatives: - Established the Working Group on Liquidity (WGL); transposed basic principles into Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR). (BCBS (2008a)) - Issued guidance on liquidity risk management processes (around 17 principles) for medium and large, complex banks. (BCBS (2008b)) - Proposed minimum liquidity standards via LCR and NSFR, with monitoring tools under Basel III. (BCBS (2010a, 2012a, 2013a and 2014)) - Developed Principles for Sound Stress Testing Practices and Supervision integrating liquidity risk. (BCBS (2012b)) - Issued guidance on intraday liquidity monitoring indicators. (BCBS (2013b)) - BIS Research Task Force (RTF) and BCBS surveys and studies: - Surveyed industry and supervisory practices in liquidity stress testing and interaction with solvency and contagion stress testing. (BCBS (2013c)) - Surveyed literature of risk drivers of liquidity stress consistent with LCR categories. (BCBS (2013d)) - Outlined approaches to model interaction between liquidity and solvency risks from a macroprudential perspective. (BCBS (2015)) - Surveyed impact assessment of liquidity requirements and interaction with capital requirements. (BCBS (2016b)) ### V. Conceptualization of Liquidity Risk - Liquidity stress tests capture the risk that a bank cannot generate sufficient funding to satisfy short-term payment obligations following a sudden realization of liabilities. - They assess adequacy of funding sources over a defined stress horizon and typically do not directly assume central bank LOLR support. - Two broad, mutually reinforcing types of liquidity risk: - Funding liquidity risk: inability to meet current and future cash flow needs due to run-off of funding liabilities, contingent obligations, disruptions to cash inflows, maturity mismatches, and access to unsecured retail/wholesale funding markets. - Market liquidity risk: inability to buy or sell sizeable volumes of securities at low cost with limited price impact; captured by volume measures (turnover ratios) and price-based measures (bid-ask spreads, price impact). - Market liquidity considerations in stress tests: - Mark-to-market (MtM) valuation changes for trading or available-for-sale (AfS) securities. - Extraordinary impairment losses for held-to-maturity (HtM) assets from defaulting obligors or forced discounted sales. - Assumptions on asset value declines and collateral haircuts affect cash flow severity. - In systemic crises, some eligible collateral may be repo-ed with the central bank as part of open market operations (Chailloux and Jobst, 2012). - Reinforcing dynamics observed during the GFC: - Market illiquidity can evolve into funding illiquidity and vice versa (e.g., swap market drying up in late-2007 for European banks seeking U.S. dollar funding). - Monitoring liquidity risk requires combined price and quantity-based information on balance sheets, monetary dynamics, and funding market developments. - Common liquidity risk indicators include: - Share of non-core funding (short-term, wholesale, foreign exchange) in total liabilities. - Detailed decomposition of assets and liabilities, e.g., share of HQLAs in total assets. ### VI. FSAP Coverage and Tabulated Resources (as presented) - FSAP sample and related listings: - Table 1: S-29 and Other G-20 Countries: Status of FSAPs since FY 2010 (lists jurisdictions and FSAP completion years). - Appendix materials include: - I. FSAP Liquidity Stress Tests since FY2011 - II. Funding and Market Liquidity - III. Regulatory Liquidity Risk Measures under Basel III: LCR and NSFR - IV. The Interaction and Integration of Solvency and Liquidity Risks - V. Liquidity Stress Testing Using Implied Cash Flows - VI. Liquidity Stress Testing: Reporting Template - VII. Cash Flow-Based Liquidity Stress Tests - Appendix Tables include: - Liquidity Stress Test Matrix (STeM) for FSAPs for Systemically Important Financial Systems (Illustrative) - Overview of the Basel II and III Capital Requirements and Liquidity Standards - Liquidity Stress Test Tool—Summary of Assumptions - Liquidity Stress Test Results—Implied Cash Flow Tests *Source: IMF working paper wp17102 (References and selected sections of the paper).* ### Appendix III), asset-liability maturity mismatches, and gross open currency positions. The ### Appendix III), asset-liability maturity mismatches, and gross open currency positions. ### Central banks and parent banks as liquidity backstops - Central banks can act as lender of last resort (LOLR) in severe crises; example given: - The U.S. Federal Reserve entered into swap agreements with several central banks that provided U.S. dollar funding to domestic banks and enabled the ECB to provide unlimited three-month U.S. dollar funding after re-intensification of funding strains in Europe. - The ECB’s longer-term refinancing operation (LTRO) program removed intermittent funding problems during the European sovereign debt crisis. - Parent banks can provide credit lines to subsidiaries to preserve funding access; limitations were observed during the GFC: - Episodes of ring-fencing restricted transferability of capital and liquidity (Cerutti and others, 2010). - Parent funding by Western banks proved more reliable than alternative funding sources for branches and subsidiaries in Central and Eastern Europe, supported by the Vienna Initiative. - Major reason parents did not provide liquidity was idiosyncratic liquidity shocks at the parent from severe (perceived) solvency problems within the banking group. - Note: The Fed also provided liquidity to large international banks, but only to the U.S. branches of foreign banking organizations (FBOs). ### Conceptualization of liquidity risk - Liquidity risk increases with higher leverage and maturity mismatch. - Funding sources and associated vulnerability dimensions: - Central Bank: tenders, standing facilities – discount windows (operational/contingency) - Money Markets and Deposits: inter-bank lending, commercial paper, term and demand deposits (operational/contingency) - Money Markets (SFTs): repo, securities borrowing and lending, asset-backed commercial paper (ABCP) (contingency) - Capital Markets: asset-backed securitization, covered bonds (structural); plain vanilla debt, (private) equity, hybrid capital (structural) - Liquidity stress testing approaches: - Cumulative (implied cash flow tests) over a specified survival period to capture cumulative effect of in- and outflows. - Non-cumulative (limit system such as liquidity ratios and minimum requirements). - Key benchmarks: Basel III liquidity metrics — Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR). ### Liquidity indicators (overview) - Monetary conditions and capital flows: - Base money and broader monetary aggregates - Policy and money market interest rates - Access to central bank liquidity (e.g., bidding volumes) - Monetary conditions index (MCI) 1/ - Excess bank reserves - Volume of short-term capital inflows (esp. if intermediated by banks) - Institutional and funding liquidity: - Volume of secured/unsecured funding via securities financing transactions (SFTs) 2/ - Spread between secured/unsecured wholesale funding rate and effective policy rate - Liquidity ratios (LCR, NSFR, loan-to-deposit ratio, share of non-core funding, liquid asset ratio) - Unsecured lending rate and counterparty risk (e.g., LIBOR and LIBOR-OIS spread) - Maturity mismatch measures - Valuation haircuts on collateral for SFTs 2/ - Net cash flow estimates - FX swap basis - Gross open foreign currency position - Violation of arbitrage conditions (e.g., bond-CDS basis, covered interest parity) - Spreads between assets with similar credit risk characteristics - Qualitative surveys on funding conditions - Volume of securities issuance - Market liquidity: - Bid-ask spreads on selected assets - Transaction volumes (incl. average transaction size) - Qualitative fund manager surveys - Sources: CGFS (2011); Jobst (2012); and Nier and others (2014). Note: 1/ such as the elasticity of aggregate demand to the real short-term interest rate and the real effective exchange rate; 2/ includes repo and securities lending. ### Challenges in scenario design and calibration - Two primary difficulties: - Liquidity crises are partly attributable to psychological factors or confidence effects, idiosyncratic and hard to model. - Limited availability of granular data (e.g., asset encumbrance, collateral details, repos/reverse repos) and confidentiality of bank liquidity information constrain comprehensive model development. - Recent stress tests have focused on funding liquidity risk: - 2011 and 2014 EU solvency stress tests included a cost of funding shock linked to sovereign stress and assumed higher wholesale and retail funding needs due to higher interest rates, lower collateral values, and rising deposit-taking costs. - ECB macroeconomic stress testing framework explicitly simulated a funding volume shock in adverse scenarios. ### FSAP liquidity stress testing framework — scope and approach - Common approaches in FSAPs: - Top-down (TD) tests often conducted by authorities with IMF input, jointly with IMF staff, or independently by authorities or IMF staff. - Bottom-up (BU) tests increasingly used; banks provide granular data under supervisory templates/assumptions with guidance from authorities/IMF staff. - Coverage considerations: - Systemically important banks by solvency are usually relevant for liquidity analysis; aggregate effects of many smaller banks can also be material. - Some FSAPs covered the entire banking sector (e.g., Brazil, Denmark, Switzerland). - Between September 2010 and December 2016, nine of the 29 FSAPs that incorporated liquidity stress tests (for which detailed information is publicly available) included nearly all banks; more than 80 percent of system assets were covered in eight other cases (Australia, Belgium, Canada, China, Denmark, France, India, and Turkey). - Investment banks, foreign branches and subsidiaries, and systemically relevant shadow banking activities should ideally be included due to their role in funding markets. ### Framework elements (Table 4 summary) - 1. Scope - Approach: - BU by banks (supervisory templates/assumptions; guidance from authorities/IMF staff) - TD by authorities (own assumptions/templates or IMF templates/assumptions) - TD by IMF staff (IMF templates/assumptions) - Coverage: - Institutions: Mostly the largest banks, including foreign subsidiaries and branches - Market share: In most countries >80 percent of total banking sector assets. - Data: - Source: Banks' own data, supervisory data, and public data - Cut-off date: End-quarter or end of last fiscal year - Reporting basis: Mostly consolidated banking groups, but also unconsolidated domestic businesses/solo basis in many countries - 2. Scenario design - Tests: - Implied cash flow test (cumulative/non-cumulative) over 5/30 days with focus on sudden, sizeable withdrawal of funding (liabilities) and sufficiency of existing assets after valuation haircuts and amortization; alternative scenarios include: - (i) restricted run-off to deposit and wholesale funding (i.e., selected customer deposits are unaffected) - (ii) availability of intergroup funding - (iii) unexpected cash outflows and drawdown of unused credit lines (behavioral cash flows) due to withdrawal of contingent liabilities and inability of rolling over maturing unsecured wholesale funding - Asset-liability mismatch analysis over different risk horizon/maturity buckets (with and without rollover restrictions) - Basel III liquidity measures (LCR and NSFR); often approximated based on contractual maturities and credit quality assumptions - Risk horizon: One or five working days (one week) and/or one month - Risks: Funding liquidity risk (run-off rates, renewal/call-back/rollover rates); Market liquidity risk (valuation haircuts market-based or pre-defined) - Calibration: - Historical experience of banks after the collapse of Lehman Bros. and other episodes - Expert judgment on liabilities run-off, valuation haircuts, and amortization - Other issues: Asset encumbrance; link to solvency stress test and scenarios; buffer (counterbalancing capacity; offsetting contractual inflows due to central bank support) - Benchmarks/Metrics/Output: - Positive net cash inflow: ability of banks’ liquidity buffers under stressed scenarios to cover expected and potential outflows over a given time period - Regulatory liquidity ratio(s): LCR, NSFR, and/or national liquidity risk measure - 3. Methodology - Models and templates: - IMF templates and assumptions: (i) implied cash flow approach (Čihák, 2007; Catalán, 2015; Jobst, 2016); (ii) LCR/NSFR templates (Schmieder and others, 2012) - Regulatory minimum measures: LCR and NSFR (Basel III liquidity risk framework) - Macro-financial model: econometric approach (possibly combined with solvency feedback effects), e.g., Barnhill and Schumacher (2011) ### Interaction of solvency and liquidity - More comprehensive macroprudential stress tests should incorporate negative feedback loops between solvency conditions and liquidity risk to assess systemic risk and differentiate banks’ susceptibility to solvency-induced liquidity stress. - Empirical evidence: solvency and liquidity stress tests that do not account for interactions substantially underestimate risk exposure of individual banks and banking systems (Puhr and Schmitz, 2014). - Practical implementation of integrated solvency–liquidity stress testing remains at an early stage (BCBS, 2013c and 2015). *Source: IMF working paper content as provided.* ### 4. Communication ### 4. Communication ### Data and reporting basis - Liquidity stress tests are run on granular, bank-level data; comprehensiveness depends on data quality (accuracy and coverage) and availability. - Data granularity increases with system complexity and diversity of sources and use of funds. - TD test data typically comprise confidential prudential information gathered from supervisory liquidity reporting; in many cases data cover broad categories of assets and liabilities with breakdowns of maturity terms and differentiation by currency. Examples cited include: Australia, Austria, Brazil, Germany, Hong Kong SAR, Korea, Poland, Spain, Sweden, Turkey, the United Kingdom; and currency differentiation in Austria, Korea, Singapore and Turkey. Public data used in some cases (e.g., Norway and the United States). - BU tests by banks themselves using own data require assessment of internal controls, risk management and corporate governance to include findings in FSAP assessment (examples: Belgium, China, Denmark, France, India, Japan, Korea, Singapore and South Africa). - Ideal data cut-off date coincides with that of parallel solvency stress test to ensure consistency and facilitate feedback effects. - Consolidation level: tests may be run on consolidated or legal entity (solo) basis. Solo basis relevant for large financial conglomerates or international groups with intragroup funding and potential cross-border ring-fencing. Examples of solo tests: Germany, Ireland, South Africa, United Kingdom. Examples of both solo and consolidated: Belgium, Hong Kong SAR, Singapore. Most FSAPs apply consolidated data. Cross-border liquidity stress tests using consolidated data were applied in the Spain FSAP using the Espinosa-Vega and Sole (2011) methodology. ### Scenario design: scope, risks, and benchmarks - Scenario design comprises: (i) definition of scenarios (scope, severity); (ii) exogenous stress assumptions; (iii) pass/fail benchmarks. - Liquidity stress tests assess short-term or medium-term resilience to sudden, sizeable withdrawals of funding and insufficient call-backs on outstanding claims. Tests include: - Cash flow mismatch analyses over different risk horizons focused on sudden withdrawals of short-term funding and sufficiency of selling unencumbered assets under asset-specific haircuts; or - Liquidity ratio-based analysis over a longer risk horizon. - Tests may include reverse stress tests (“until it breaks”) and traditional projections under specified scenarios. - Common policy measures considered within tests: - Liquidity buffer requirements; - Stable funding requirements; - Liquidity charges on non-core funding; - Reserve requirements with central bank; - Restrictions on open foreign currency positions and/or FX-denominated funding. - Typical modeling approaches: - Implied cash flow (ICF) tests simulate bank run-type withdrawals, drawdowns of contingent claims and related party funding obligations; cash inflows from contingent funding and proceeds from selling liquid assets or collateralized funding applied fully or in part; may augment with market-based measures of funding cost sensitivity. - Basel III liquidity measures: LCR and NSFR applied on consolidated basis. - Standard liquidity ratios by national authorities (non-cumulative measures for short- and medium-term resilience). - Risk horizon conventions: - Cash flow tests often analyze consecutive (cumulative) daily cash outflows over several days (typically five working days or one week) or one-off, non-cumulative aggregate cash outflows over 30 days; structural mismatches (NSFR-like) assessed over one-year horizon. - Calibration: - Most FSAP exercises entail deterministic stress tests based on ICF and cash flow tests; simulation/network approaches used less frequently. - Scenario assumptions intended to be “extreme yet plausible.” - ICF tests and standard measures (LCR, NSFR) contain pre-defined assumptions subject to sensitivity analysis. Other deterministic tests use historical worst-case scenarios, expert judgment or statistical models/valuation approaches. - Other scenario considerations: - Quantification of assets/liabilities should, if possible, include off-balance sheet items and contingent claims (committed but unused credit lines/liquidity facilities). - Asset encumbrance must be included where possible; liquidity buffer usually limited to unencumbered liquid assets (excluding encumbered assets except cash/cash equivalents). - Inconsistent encumbrance adjustments across public/supervisory data may require assuming a uniform degree of asset encumbrance plus haircuts. - Link to solvency: - Changes in funding costs during stress can help link liquidity scenarios to capital adequacy in solvency stress tests. Recent FSAPs estimate impact of shocks to balance sheets through cost of funding of short-term debt and maturing portion of long-term debt with a lag (examples: Brazil, Germany, Spain, United Kingdom). - Funding cost elasticity is non-linear to solvency changes and may differ across maturity tenors and funding types. - Feedback/second-round effects between liquidity and solvency are important but operational implementation in system-wide tests remains at a seminal stage. ### Methodology and tools - Method selection depends on banking sector sophistication and features including deposit vs. wholesale funding importance, off-balance sheet derivatives funding, intra-group lending concentration, and counterparty risk nature. - TD tests in FSAPs are generally ICF tests; prerequisites include access to contractual cash flows by maturity buckets and behavioral data. Deterministic liquidity stress tests developed by Čihák (2007), Schmieder and others (2012) and Jobst (2017) are applied in most FSAPs. - Regulatory minimum measures LCR and NSFR have become staple stress test methods. - For sophisticated systems with market data, stochastic/market-based models may complement deterministic tests (e.g., Jobst, 2011 and 2012). - Macro-financial econometric models combining solvency feedback effects are still nascent (e.g., Barnhill and Schumacher, 2011). - Peer comparisons used to estimate relative liquidity situations by applying common scenarios and benchmarks across banks. ### Communication: presentation and publication - Presentation: - Main objective: draw attention of bank management, supervisors and regulators to potential risks and galvanize action. - FSAP liquidity stress tests are bank-by-bank but results are generally aggregated for confidentiality. Templates for input by authorities are designed to be: - consistent with local regulatory requirements and relevant international regulatory standards (e.g., Basel III) for cross-country comparison; and - sufficiently granular showing: (i) peer groups, (ii) some measure of dispersion (ratio buckets or maturity tenors), (iii) number of banks failing to meet the benchmark, (iv) percentage of total sample assets included in the tests failing to meet the benchmark, and (v) detailed assumptions clarifying key limitations. - Findings used to (i) provide quantitative support for FSAP stability risk assessments and (ii) facilitate policy discussions on risk mitigation and crisis preparedness. - Publication: - Communication is critical; published analysis should aim for a complete assessment while avoiding complacency or undue alarm. Prudential-data-based disclosure is sensitive because market participants may take positions in short-term money markets. - Objectives, definitions, assumptions, methods and limitations are usually detailed in Technical Notes and/or supplementary FSSA information; publication of these documents is voluntary for country authorities. - Mandatory summaries presented in the FSSA in standard STeM framework to improve transparency and comparisons. - Aggregated system-wide results almost always disclosed (liabilities run-off, valuation haircuts, amortization of assets) in form of liquidity ratios and/or maximum days of resilience. Authorities rarely authorize publication of individual bank results. - Publication record in sample: all jurisdictions in sample (30) authorized publication of at least main results and general stress testing framework information. Nineteen (19) authorized full publication of Technical Notes containing all details of liquidity stress test component (countries listed in source). ### Caveats and interpretation - Aggregating individual liquidity risk measures across banks may not capture system-wide risks; prudential measures have an institutional focus and do not capture herding behavior or joint sensitivities. - Liquidity stress tests typically do not explicitly assume refinancing via central banks as lenders of last resort; assumptions on haircuts often silent on central bank engagement or impaired wholesale markets. - Tests are static snapshots and implicitly assume simultaneous escalating liquidity risk across banks; estimated shortfalls indicate vulnerability to assumptions rather than actual liquidity needs given central bank backstops. Schuermann (2012) notes rapid dynamism of liquidity positions may render snapshots quickly outdated. - Results need qualification by mitigating considerations, e.g., deposit reallocation within sector, offsetting contractual capital inflows, possible central bank support (committed facilities, wider eligible collateral), and deposit insurance schemes. ### Conclusion and outlook - The paper provides a conceptual overview of liquidity stress testing and its implementation in IMF FSAPs for countries with systemically important financial sectors. Variation in implementation reflects structural characteristics and prudential requirements across countries; this supports consistent implementation across countries in future exercises. - Future of liquidity stress testing likely multi-pronged with a shift toward comprehensive cash flow-based tests and a deeper understanding of solvency-liquidity interactions. 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IMF, 2011c, “Luxembourg: Financial System Stability Assessment—Update,” IMF Country Report No. 11/148, June (Washington, D.C.: International Monetary Fund), available at https://www.imf.org/external/pubs/ft/scr/2011/cr11148.pdf. - IMF, 2011d, “United Kingdom FSAP Update: Stress Testing the Banking Sector Technical Note,” Country Report No. 11/227, July (Washington, D.C.: International Monetary Fund), available at http://www.imf.org/external/pubs/ft/scr/2011/cr11227.pdf. - IMF, 2011e, “Sweden: Technical Note on Stress Testing,” Country Report No. 11/288, September (Washington, D.C.: International Monetary Fund), available at http://www.imf.org/external/pubs/ft/scr/2011/cr11288.pdf. - IMF, 2011f, “People’s Republic of China: Financial System Stability Assessment,” IMF Country Report No. 11/321, November (Washington, D.C.: International Monetary Fund), available at http://www.imf.org/external/pubs/ft/scr/2011/cr11321.pdf. - IMF, 2011g, “Russian Federation: Technical Note on Stress Testing,” Country Report No. 11/334, December (Washington, D.C.: International Monetary Fund), available at https://www.imf.org/external/pubs/ft/scr/2011/cr11334.pdf. - IMF, 2011h, “Germany: Technical Note on Stress Testing,” Country Report No. 11/371, December (Washington, D.C.: International Monetary Fund), available at http://www.imf.org/external/pubs/ft/scr/2011/cr11371.pdf. - IMF, 2012a, “Mexico: Financial System Stability Assessment,” IMF Country Report No. 12/65, June (Washington, D.C.: International Monetary Fund), available at https://www.imf.org/external/pubs/ft/scr/2012/cr1265.pdf. - IMF, 2012b, “Spain: Financial System Stability Assessment,” IMF Country Report No. 12/137, June (Washington, D.C.: International Monetary Fund), available at http://www.imf.org/external/pubs/ft/scr/2012/cr12137.pdf. - IMF, 2012c, “Japan: Financial System Stability Assessment,” IMF Country Report No. 12/210, August (Washington, D.C.: International Monetary Fund), available at https://www.imf.org/external/pubs/ft/scr/2012/cr12210.pdf. - IMF, 2012d, “Turkey: Financial System Stability Assessment,” IMF Country Report No. 12/261, September (Washington, D.C.: International Monetary Fund), available at http://www.imf.org/external/pubs/ft/scr/2012/cr12261.pdf. - IMF, 2012e, “Macro-financial Stress Testing—Principles and Practices,” IMF Policy Paper, August (Washington, D.C.: International Monetary Fund), available at http://www.imf.org/external/np/pp/eng/2012/082212.pdf. - IMF, 2012f, “Saudi Arabia: Financial System Stability Assessment,” IMF Country Report No. 12/92, April (Washington, D.C.: International Monetary Fund), available at http://www.imf.org/external/pubs/ft/scr/2012/cr1292.pdf. - IMF, 2012g, “Australia: Financial System Stability Assessment,” IMF Country Report No. 12/308, November (Washington, D.C.: International Monetary Fund), available at https://www.imf.org/external/pubs/ft/scr/2012/cr12308.pdf. - IMF, 2013a, “Mandatory Financial Stability Assessments under the Financial Sector Assessment Program: Update,” IMF Policy Paper, November (Washington, D.C.: International Monetary Fund), available at http://www.imf.org/external/np/pp/eng/2013/111513.pdf. - IMF, 2013b, European Union: Publication of Financial Sector Assessment Program Documentation—Technical Note on Stress Testing of Banks,” IMF Country Report No. 13/68, March (Washington, D.C.: International Monetary Fund), available at http://www.imf.org/external/pubs/ft/scr/2013/cr1368.pdf. - IMF, 2013c, “India: Financial System Stability Assessment,” IMF Country Report No. 12/08, January (Washington, D.C.: International Monetary Fund), available at http://www.imf.org/external/pubs/ft/scr/2013/cr1308.pdf. - IMF, 2013d, “Belgium: Technical Note on Stress Testing the Banking and Insurance Sectors,” IMF Country Report No. 13/137, May (Washington, D.C.: International Monetary Fund), available at http://www.imf.org/external/pubs/ft/scr/2013/cr13137.pdf. - IMF, 2013e, “Brazil: Technical Note on Stress Testing the Banking Sector,” IMF Country Report No. 13/147, June (Washington, D.C.: International Monetary Fund), available at http://www.imf.org/external/pubs/ft/scr/2013/cr13147.pdf. - IMF, 2013f, “France: Technical Note on Stress Testing,” IMF Country Report No. 13/185, June (Washington, D.C.: International Monetary Fund), available at https://www.imf.org/external/pubs/ft/scr/2013/cr13185.pdf. - IMF, 2013g, “Poland: Financial System Stability Assessment,” IMF Country Report No. 13/221, July (Washington, D.C.: International Monetary Fund), available at https://www.imf.org/external/pubs/ft/scr/2013/cr13221.pdf. - IMF, 2013h, “Italy: Technical Note on Stress Testing,” IMF Country Report No. 13/349, December (Washington, D.C.: International Monetary Fund), available at http://www.imf.org/external/pubs/ft/scr/2013/cr13349.pdf. - IMF, 2013i, “Singapore: Financial System Stability Assessment,” IMF Country Report No. 13/325, November (Washington, D.C.: International Monetary Fund), available at https://www.imf.org/external/pubs/ft/scr/2013/cr13325.pdf. - IMF, 2014a, “IMF Executive Board Reviews Mandatory Financial Stability Assessments under the Financial Sector Assessment Program,” Press Release No. 14/08, January (Washington, D.C.: International Monetary Fund), available at https://www.imf.org/external/np/sec/pr/2014/pr1408.htm. - IMF, 2014b, “Austria: Technical Note on Stress Testing,” IMF Country Report No. 14/16, January (Washington, D.C.: International Monetary Fund), available at http://www.imf.org/external/pubs/ft/scr/2014/cr1416.pdf. - IMF, 2014c, “Canada: Technical Note on Stress Testing,” IMF Country Report No. 14/69, March (Washington, D.C.: International Monetary Fund), available at http://www.imf.org/external/pubs/ft/scr/2014/cr1469.pdf. - IMF, 2014d, “People’s Republic of China–Hong Kong Special Administrative Region: Technical Note on Stress Testing the Banking Sector,” IMF Country Report No. 14/210, July (Washington, D.C.: International Monetary Fund), pp. 19-25, available at http://www.imf.org/external/pubs/ft/scr/2014/cr14210.pdf. - IMF, 2014e, “Switzerland: Technical Note on Stress Testing,” IMF Country Report No. 14/267, September (Washington, D.C.: International Monetary Fund), available at https://www.imf.org/external/pubs/ft/scr/2014/cr14267.pdf. - IMF, 2014f, “Denmark: Technical Note on Stress Testing,” IMF Country Report No. 14/348, December (Washington, D.C.: International Monetary Fund), available at http://www.imf.org/external/pubs/ft/scr/2014/cr14348.pdf. - IMF, 2015a, “Korea: Technical Note on Stress Testing,” IMF Country Report No. 15/06, January (Washington, D.C.: International Monetary Fund), available at https://www.imf.org/external/pubs/ft/scr/2015/cr1506.pdf. - IMF, 2015b, “South Africa: Technical Note on Stress Testing,” IMF Country Report No. 15/54, March (Washington, D.C.: International Monetary Fund), available at https://www.imf.org/external/pubs/ft/scr/2015/cr1554.pdf. - IMF, 2015c, “United States: Technical Note on Stress Testing,” IMF Country Report No. 15/173, July (Washington, D.C.: International Monetary Fund), available at https://www.imf.org/external/pubs/ft/scr/2015/cr15173.pdf. - IMF, 2015d, “Norway: Technical Note on Stress Testing,” IMF Country Report No. 15/258, September (Washington, D.C.: International Monetary Fund), available at https://www.imf.org/external/pubs/ft/scr/2015/cr15258.pdf. - IMF, 2015e, “The Financial Sector Assessment Program—Factsheet,” September 21 (Washington, D.C.: International Monetary Fund), available at http://www.imf.org/external/np/exr/facts/fsap.htm. - IMF, 2015f, “Chapter II: Market Liquidity—Resilient or Fleeting?,” Global Financial Stability Report, Monetary and Capital Markets Department, World Economic and Financial Surveys, October (Washington, D.C.: International Monetary Fund), available at http://www.imf.org/External/Pubs/FT/GFSR/2015/02/pdf/c2_v2.pdf. - IMF, 2016a, “Argentina: Financial Sector Stability—Technical Note,” IMF Country Report No. 16/65, February (Washington, D.C.: International Monetary Fund), available at https://www.imf.org/external/pubs/ft/scr/2016/cr1665.pdf. - IMF, 2016b, “United Kingdom: Technical Note on Stress Testing the Banking Sector,” IMF Country Report No. 16/163, June 17 (Washington, D.C.: International Monetary Fund), available at https://www.imf.org/external/pubs/ft/scr/2016/cr16163.pdf. - IMF, 2016c, “Germany: Technical Note on Stress Testing the Banking and Insurance Sectors,” IMF Country Report No. 16/172, June 27 (Washington, D.C.: International Monetary Fund), available at https://www.imf.org/external/pubs/ft/scr/2016/cr16172.pdf. - IMF, 2016d, “Russian Federation: Technical NoteStress Testing,” IMF Country Report No. 16/306, September (Washington, D.C.: International Monetary Fund), available at https://www.imf.org/external/pubs/ft/scr/2016/cr16306.pdf. - IMF, 2016e, “Ireland: Technical Note on Stress Testing the Banking System,” IMF Country Report No. 16/315, September (Washington, D.C.: International Monetary Fund), available at https://www.imf.org/external/pubs/ft/scr/2016/cr16315.pdf. - IMF, 2017a, “Finland: Stress Testing the Banking System and Interconnectedness Analysis,” IMF Country Report No. 17/6, January (Washington, D.C.: International Monetary Fund), available at https://www.imf.org/~/media/Files/Publications/CR/2017/cr1706.ashx. - IMF, 2017b, “Turkey: Financial System Stability Assessment,” IMF Country Report No. 17/35, February (Washington, D.C.: International Monetary Fund), available at http://www.imf.org/~/media/Files/Publications/CR/2017/cr1735.ashx. ### Central banks, regulators, and other institutional publications - European Central Bank (ECB), 2008, “EU Banks Liquidity Stress Tests and Contingency Funding Plans,” (Frankfurt am Main: European Central Bank), available at http://www.ecb.int/pub/pdf/other/eubanksliquiditystresstesting200811en.pdf. - European Systemic Risk Board (ESRB), 2012, “Recommendation of the European Systemic Risk Board on Funding of Credit Institutions,” ESRB/2012/2, 20 December (Frankfurt am Main: European Central Bank), available at http://www.esrb.europa.eu/pub/pdf/recommendations/2012/ESRB_2011_2.en.pdf?ee05b. - Financial Stability Board (FSB), 2012, “Strengthening Oversight and Regulation of Shadow Banking: An Integrated Overview of Policy Recommendations,” November (Basel: Bank for International Settlements), available at http://www.financialstabilityboard.org/publications/r_121118.pdf. - Oesterreichische Nationalbank (OeNB), 2009. Financial Stability Report 18. December (Vienna: Oesterreichische Nationalbank), available at http://www.oenb.at/en/img/fsr_18_gesamt_tcm16-144837.pdf. - Markets Committee, 2016, “Electronic Trading in Fixed Income Markets,” January (Basel: Bank for International Settlements), available at https://www.bis.org/publ/mktc07.pdf. ### Additional thematic and methodological references - Caceres, Carlos, Daniel, Christiana, Aymanns, Christoph and Liliana Schumacher, 2016, “Bank Solvency and Funding Costs,” IMF Working Paper No. 16/64 (Washington, D.C.: International Monetary Fund), available at https://www.imf.org/~/media/Websites/IMF/imported-full-text-pdf/external/pubs/ft/wp/2016/_wp1664.ashx. - Coval, Joshua and Erik Stafford, 2007, “Asset Fire Sales (and Purchases) in Equity Markets,” Journal of Financial Economics, Vol. 86, No. 2, pp. 479-512. - Shleifer, Andrei and Robert Vishny, 2010, “Fire Sales in Finance and Macroeconomics,” NBER Working Paper No. 16642 (Cambridge, Massachusetts: National Bureau of Economic Research). - Wong, Eric and Cho-Hoi Hui, 2009, “A Liquidity Risk Stress-Testing Framework with Interaction between Market and Credit Risks,” Working Paper No. 06/2009 (Hong Kong, P.R. China: Hong Kong Monetary Authority). *References as listed in the source PDF "wp17102 - REFERENCES".* ### Appendix Table 1. Liquidity Stress Test ### Appendix Table 1. Liquidity Stress Test ### Funding liquidity risk: scope and assumptions - The assessment reflects the realization (and potential change) of expected and contingent cash in- and outflows during times of stress and includes assumptions on: - Run-off rates for secured/unsecured wholesale and retail funding; - Amortization/renewal rates for secured/unsecured wholesale and retail lending (at contractual maturities); - Draw-down rates for interbank credit and liquidity facilities; - The convertibility of foreign currency-denominated net cash flows and the scope of unsecured support in convertible currencies from related and third parties in the form of committed/uncommitted lines); - The treatment of expected and contingent liabilities from related and third parties; and - The capacity to access unsecured financing and complete securitization during times of stress. ### Market liquidity risk: valuation haircuts and influences on cash inflows - Degree of market liquidity risk (i.e., valuation haircuts) affecting expected cash inflows from asset sales and the collateralization of secured funding are influenced by: - The asset concentrations and banks’ asset encumbrance; - The potential impact of downgrades of marketable assets; - The composition of the bank’s liquidity buffer comprising marketable, or otherwise realizable, assets; - The magnitude of foreign currency (FX) funding needs—on aggregate and for each currency (if there is no full convertibility between currencies over the stress testing time horizon); - The relevance of derivatives trading for the management of liquidity risk, including asset and FX swaps (with the attendant potential for collateral and margin calls); - The extent to which assets might be encumbered and are subject to haircuts when used as collateral for central bank and securities financing transactions (SFT) during times of stress, such as repos and securities lending; and - The availability of funding via potentially re-usable securities received as collateral (“re-hypothecation”). ### Regulatory liquidity risk measures under Basel III: LCR and NSFR - Context: - Basel III added liquidity risk to the regulatory perimeter; internationally active banks must meet two quantitative liquidity metrics for two different time horizons (one month and one year). - Liquidity Coverage Ratio (LCR): - Purpose: promote short-term resilience by requiring a stock of unencumbered, high-quality liquid assets (HQLAs) to withstand liability run-off over a stressed 30-day scenario. - Definition: potential funding shortfall = cash outflows less cash inflows (subject to a cap of 75 percent of total expected cash outflows). - Interpretation: A LCR value of less than 100 percent indicates a liquidity shortfall. - Quoted definition: “…the LCR numerator consists of a stock of unencumbered, high-quality liquid assets that must be available to cover any net [cash] outflow, while the denominator is comprised of cash outflows less cash inflows (subject to a cap at 75 [percent] of total outflows) that are expected to occur in a severe stress scenario (BCBS, 2012b and 2013a).” - January 2013 finalization led to changes including: - Extending Level 2B HQLA to include RMBS (rated “AA” and higher) with a haircut of 25 percent; lower-rated corporate bonds (between “A+” and “BBB-”) and common equity each subject to a 50 percent haircut; and increasing the cap of Level 2B assets from 10 to 15 percent; - Applying a lower run-off rate of 3 percent to stable deposits where pre-funded and explicitly government-guaranteed deposit insurance schemes exist and where access to deposits is available the next day after deposit insurance is triggered; - Lowering the draw-down rates from 100 to 30 percent for undrawn but committed liquidity facilities to non-financial corporates, sovereigns and central banks, public sector enterprises (PSE) and multilateral development banks; from 100 to 40 percent for undrawn but committed credit/liquidity facilities to banks subject to prudential supervision; and from 75 to 40 percent for deposits from non-financials, sovereigns and PSEs; - Increasing liquidity needs related to derivatives; - Applying a zero percent run-off rate for operations with central banks for all types of assets (in addition to secured funding backed by Level 1 assets with any counterparty); and - Providing for national treatment of trade finance obligations. - Net Stable Funding Ratio (NSFR): - Purpose: limit the stock of unstable funding by encouraging longer-term borrowing and restrict liquidity mismatches from excessive maturity transformation. - Observation/implementation: subject to an observation period with a review clause prior to implementation date of January 1, 2018. - Definition: requires a stable funding profile over a one-year horizon; reflects proportion of longer term (and less liquid) assets funded by stable sources (customer deposits, wholesale funding > one year, equity), excluding short-term liabilities. - Interpretation: A value of less than 100 percent indicates a shortfall in stable funding. - Note on potential conflict: Compliance with the NSFR could conflict with plans to make senior bondholders absorb bank losses under mandatory “bail-in” clauses because bail-in clauses could impede issuance of longer maturity unsecured debt and increase funding costs. ### Appendix Table 2: Selected Basel II and III minimum capital and liquidity transition numbers (2011–2019) - Note on LCR introduction: LCR introduced as planned on 1 January 2015, but the minimum requirement begins at 60 percent, rising in equal annual steps of 10 percentage points to reach 100 percent on January 1, 2019. - Minimum Common Equity Capital Ratio by year: - 2011: 3.50 - 2012: 4.00 - 2013: 4.50 - 2014: 4.50 - 2015: 4.50 - 2016: 4.50 - 2017: 4.50 - 2018: (table context continues) - Capital Conservation Buffer progression: - 2014: 0.625 - 2015: 1.25 - 2016: 1.875 - 2017: 2.50 - Minimum Common Equity + Capital Conservation Buffer progression (selected years shown in table): - 2011: 3.50 - 2012: 4.00 - 2013: 4.50 - 2014: 5.125 - 2015: 5.75 - 2016: 6.375 - 2017: 7.00 - Phase-in of Deductions from CET1: - 20, 40, 60, 80, 100, 100 (yearly phase-in percentages as listed) - Minimum Tier 1 Capital progression: - 2011: 4.50 - 2012: 5.50 - 2013: 6.00 - 2014: 6.00 - 2015: 6.00 - 2016: 6.00 - 2017: 6.00 - Minimum Total Capital: - 2011–2017: 8.00 (listed for each year in table) - Minimum Total Capital + Capital Conservation Buffer progression (selected years): - 2014: 8.625 - 2015: 9.25 - 2016: 9.875 - 2017: 10.50 - Liquidity Coverage Ratio (LCR) minimum standard introduction steps: - 60, 70, 80, 90, 100 (annual minimum standard percentages listed) - Net Stable Funding Ratio (NSFR): - Observation period begins; supervisory monitoring; parallel run January 2012 - January 2017; disclosure starts in January 2015; phased out over a 10-year horizon beginning 2013 (as listed in table context). ### Interaction and integration of solvency and liquidity risks: literature and frameworks - Practical integration of solvency and liquidity feedbacks in macroprudential stress tests remains at an early stage; examples and approaches include: - Van den End (2008): stress testing model endogenizing market and funding liquidity risk including behavioral and reputational feedback effects. - Bank of England (Aikman and others, 2009): Risk Assessment Model for Systemic Institutions (RAMSI) simulating banks’ liquidity conditional on capitalization and confidence effects. - Wong and Hui (2009): framework linking default risk and deposit outflows; simulates mark-to-market losses leading to deposit outflows and asset fire sales. - Barnhill and Schumacher (2011): general empirical model incorporating multiple solvency shock sources and computing longer term impact of funding shocks. - Schmieder and others (2012): Excel-based tool allowing liquidity tests informed by banks’ solvency conditions and simulating increased funding costs from solvency changes. - Jobst (2014): Systemic Risk-adjusted Liquidity (SRL) model combining option pricing, market data, and balance sheet information to generate probabilistic measures of joint liquidity events. - Bank of Canada Macro-Financial Risk Assessment Framework (Anand, Bédard-Pagé and Traclet, 2014): top-down liquidity stress test including additional bank solvency pressures from funding rationing and interbank counterparty spillovers. - Hesse and others (2014): integration of macro-financial linkages, including spillovers from the European periphery, into bank solvency and liquidity resilience stress testing. ### Liquidity stress testing using implied cash flows (ICF) — methodology and key assumptions - Overview: - The ICF approach models the impact of sudden, sizeable withdrawals of funding (liabilities run-off) and unscheduled changes accounting for repayment of claims and availability of liquidity buffers over horizons of five days (cumulative) and 30 days (non-cumulative). - The tool captures: (i) market liquidity risk—decline in asset values and ability to use assets as collateral or sell at stressed values; (ii) funding liquidity risk—callback/renewal rates of scheduled and unscheduled cash flows; and (iii) utilization rate of contingent claims and liabilities/funding swap arrangements. - Components considered: - Liquid assets available for sale or collateralized funding (subject to valuation haircuts and encumbrance assumptions) include: - cash and cash balances with central banks; - securities and bank loans eligible for refinancing at domestic and major central banks; - securities and bank loans mobilizable in repo transactions; and - marketable securities in general. - Cash inflows comprise: - expected repayment amount of outstanding credit with/without liquid collateral; - expected outflows of cash and decline of liquid assets related to maturing transactions (e.g., repo and securities lending transactions); - expected and potential net cash flows related to derivatives (excl. credit derivatives); - potential inflows from committed/uncommitted credit lines to related and third parties. - Cash outflows comprise: - run-off of maturing and non-maturity funding with/without liquid collateral; - expected inflows of cash and increase of liquid assets related to reverse repo and securities borrowing; - maturing repayments to related parties; and - committed/uncommitted contingent claims to related and third parties. - Evaluation and thresholds: - The liquidity stress test is evaluated numerically as the ratio between potentially available liquidity and potentially required liquidity. A value of at least 100 percent indicates sufficient liquidity; a value lower than 100 percent implies a liquidity shortage if the stress scenario materialized. - Additional assumptions in the ICF tool: - Only unencumbered liquid assets (generating cash inflows), i.e., assets used as collateral to receive funding (with the exception of cash/cash-equivalents), are included in the test (“liquidity scope”); - Funding via potentially re-usable securities received as collateral (“rehypothecation”) and cash inflows from new or renewed (secured/unsecured) wholesale lending (at contractual maturities) but full renewal of secured retail lending (e.g., secured lending with illiquid collateral such as residential mortgages) are not considered; - There is limited potential unsecured support in convertible currencies from related and third parties (e.g., in the form of committed line) but full convertibility between currencies (within one week). - Application note: - In the recent FSAP for the United Kingdom, the ICF tool was applied to 10 institutions covering 80 percent total banking assets. Results suggested the five-day and 30-day implied cash flow tests indicate protracted non-cumulative stressed cash flows over a longer time horizon weaken banks’ liquid buffers to a larger extent than cumulative stresses over a shorter period. *Source: Authors (excerpted from the IMF working paper appendix).* ### Appendix Table 3. Liquidity Stress ### Appendix Table 3. Liquidity Stress ### Test Tool — Summary of Assumptions - Source: Jobst (2017). - Note 1/: Many derivatives positions might be non-deliverable (typically, foreign exchange and interest rate swaps and forwards) and their valuation tends to be highly variable based on prevailing market conditions and expectations. For these positions, the valuation based on the firm’s chosen accounting treatment should be considered, and potential net cash flows (variation margin/cash settlement cost) checked for consistency with the calibration of market risk under the Basel framework. - General test constraints and assumptions: - A ratio lower than 100 percent implies a liquidity shortage if the stress scenario would materialize at the reporting date (i.e., potentially required liquidity > potentially available liquidity). - Only unencumbered liquid assets (generating cash inflows), i.e., assets used as collateral to receive funding (with the exception of cash/cash-equivalents) are included in the test (“liquidity scope”). - New unsecured financing and securitization impossible within the time horizon. - No offsetting cash inflows from new or renewed (secured/unsecured) wholesale lending (at contractual maturities) but full renewal of secured retail lending (e.g., secured lending with illiquid collateral (residential mortgages)). - Central bank eligible collateral can be monetized at appropriate haircuts. - Repo markets are open at appropriate haircuts. - Fire-sale of assets possible at appropriate haircuts. - No consideration of funding via potentially re-usable securities received as collateral ("rehypothecation"). - Limited potential unsecured support in convertible currencies from related and third parties (e.g., in the form of committed lines). - No renewal of term retail and wholesale deposits. - Full convertibility between currencies (within one week). ### Assets (cash inflows), Liabilities (cash outflows), and Cumulative 5-day ICF Test - Liquid financial assets (haircuts shown in brackets): - (i) cash and cash balances with central banks [haircut: 0 percent] - (ii) securities and bank loans eligible at major central banks [0-15] - (iii) securities and bank loans which can be mobilized in repo transactions (or another type of lending against financial collateral) [5-30] - (iv) marketable securities [10-35] - Cumulative cash inflows (over five consecutive days): - (i) expected cash inflows related to credit extension without liquid financial assets as collateral [call-back rate: 20 percent per day] - (ii) expected inflows of cash and liquid assets related to maturing transactions with liquid securities and bank loans (e.g., repo and securities lending transactions) [20] - (iii) potential inflows from committed/uncommitted credit lines to related and third parties [5/3] - Cumulative cash outflows (over five consecutive days): - (i) maturing and non-maturity funding without liquid financial assets as collateral [discount factor: 5 percent per day] (i.e., all deposits and funding from financial and non-financial corporates as well as private households and SME clients) with the exception of sovereign and other public sector and central bank clients [0] - (ii) expected outflows of cash and liquid assets related to transactions with liquid securities and bank loans (e.g., reverse repo and securities borrowing transactions) [20] - (iii) maturing outflows to related parties [20] - (iv) committed/uncommitted contingent claims to related and third parties [5] - Cumulative net cash flows: - expected and potential net cash flows related to derivatives (excl. credit derivatives) – net contractual cash flows [20] 1/ ### 30-day implied cash flow (ICF) test — Non-cumulative - Liquid financial assets (haircuts shown in brackets): - (i) cash and cash balances with central banks [0] - (ii) securities and bank loans eligible at major central banks [0-20] - (iii) securities and bank loans which can be mobilized in repo transactions (or another type of lending against financial collateral) [10-60] - (iv) marketable securities [20-70] - Non-cumulative cash inflows: - (i) expected cash inflows related to credit extension without liquid financial assets as collateral [call-back rate: 100 percent] - (ii) expected inflows of cash and liquid assets related to maturing transactions with liquid securities and bank loans (e.g., repo and securities lending transactions) [100] - (iii) expected and potential net cash flows related to derivatives (excl. credit derivatives) – net contractual cash flows [100] - (iv) potential inflows from committed/uncommitted credit lines to related and third parties [23/12] - Non-cumulative cash outflows: - (i) maturing and non-maturity funding without liquid financial assets as collateral [discount factor: 10-75 percent] (i.e., all deposits and funding from financial and non-financial corporates as well as private households and SME clients) with the exception of sovereign and other public sector and central bank clients [0] - (ii) expected outflows of cash and liquid assets related to transactions with liquid securities and bank loans (e.g., reverse repo and securities borrowing transactions) [100] - (iii) maturing outflows to related parties [100] - (iv) committed/uncommitted contingent claims to related and third parties [23] - Non-cumulative net cash flows: - expected and potential net cash flows related to derivatives (excl. credit derivatives) – net contractual cash flows [100] 1/ ### Implied Cash Flow Tests — Example test parameters and outcomes shown - Test 1a: Implied Cash Flow Test (5 Days) - Day 1: Cumulative loss of unsecured funding (up to 1 week) (percent) = 5.2; Cumulative loss of secured funding (up to 1 week) (percent) = 5.4; Minimum number of days of survival = 10000 - Day 2: Cumulative loss of unsecured funding (percent) = 10.6; Cumulative loss of secured funding (percent) = 10.2; Minimum number of days of survival = 20000 - Day 3: Cumulative loss of unsecured funding (percent) = 16.4; Cumulative loss of secured funding (percent) = 14.5; Minimum number of days of survival = 30000 - Day 4: Cumulative loss of unsecured funding (percent) = 22.4; Cumulative loss of secured funding (percent) = 18.5; Minimum number of days of survival = 40000 - Day 5: Cumulative loss of unsecured funding (percent) = 31.5; Cumulative loss of secured funding (percent) = 24.3; Minimum number of days of survival = 50000 - Test 1b: Implied Cash Flow Test (30 Days) - 30 Days: Cumulative loss of unsecured funding (percent) = 27.5; Cumulative loss of secured funding (percent) = 100.0; Survival = No; Banks illiquid (number) = 00; Banks illiquid (percent of banking system assets) = 0.0; Net cash shortfall relative to total liquid assets (percent) = 0.0; Net cash shortfall relative to total assets (percent) = 0.0 - Alternative scenarios shown: - 5-day test (cumul.) and 30-day test (non-cumul.) with “Altern. scenario: no retail deposit run” included as alternative scenario lines in charts. ### Reporting Template / Example Output Template Provided to Authorities - Appendix Figure 3: Example of Output Template Provided to Authorities. (Summary table from liquidity stress testing tool presented in Appendix V.) - Template fields and example values (selected): - t0: Cumulative loss of all unsecured funding (In percent) = 0.0; Cumulative loss of all secured funding (In percent) = 0.0; Minimum number of days of survival = 0; No. of banks illiquid = 0; Percent of banks illiquid (In percent) = 0.0; Net cash shortfall relative to total liquid assets (In percent) = 0.0; Net cash shortfall relative to total assets (In percent) = 0.0 - Day 1: Cumulative loss of all unsecured funding (In percent) = 1.9; Cumulative loss of all secured funding (In percent) = 16.1; Minimum number of days of survival = 100.0; No. of banks illiquid = 0; Percent of banks illiquid (In percent) = 0.0; Net cash shortfall relative to total liquid assets (In percent) = 0.0; Net cash shortfall relative to total assets (In percent) = 0.0 - Day 2: Cumulative loss of all unsecured funding (In percent) = 3.7; Cumulative loss of all secured funding (In percent) = 29.0; Minimum number of days of survival = 2165; No. of banks illiquid = 9; Percent of banks illiquid (In percent) = 3; Net cash shortfall relative to total liquid assets (In percent) = -4.9; Net cash shortfall relative to total assets (In percent) = -0.6; Weighted avg. capital adequacy ratio of failing banks (In percent) = 6.7; Weighted avg. Tier 1 capital ratio of failing banks (In percent) = 7.8; Weighted avg. CET1 capital ratio of failing banks (In percent) = 9.0 - Day 3: Cumulative loss of all unsecured funding (In percent) = 5.4; Cumulative loss of all secured funding (In percent) = 39.4; Minimum number of days of survival = 3271; No. of banks illiquid = 10; Percent of banks illiquid (In percent) = 0.0; Net cash shortfall relative to total liquid assets (In percent) = -36.2; Net cash shortfall relative to total assets (In percent) = -4.3; Weighted avg. capital adequacy ratio of failing banks (In percent) = 12.2; Weighted avg. Tier 1 capital ratio of failing banks (In percent) = 14.2; Weighted avg. CET1 capital ratio of failing banks (In percent) = 16.2 - Day 4 and Day 5 entries continue with increasing cumulative loss figures and shortfalls. (Template includes breakdowns by Total Sample, Group 1, Group 2 and statistics such as Number of Banks failing the test = 27/198 in one example; Liquidity Shortfall = -3,210,916 / -2,367,750 / -843,166; Liquidity Shortfall (In % of total assets) = -10.6 / -11.6 / -8.6; Liquidity Shortfall (In % of liquid assets) = -89.8 / -98.9 / -71.4.) - Top 10% (i.e., largest banks) shortfall (abs) examples: - -340,617; -421,583; -674,975; -852,080; -518,143; -403,517; -138,346; -100,426 - Percent of Liquid Assets examples: 74.9; 72.2; 81.5; 95.4; 153.0; 84.9 - Number examples: 34; 67; 43; 27 - Test 2: Maturity Mismatch Analysis (Test 2a. Total B/S and Test 2b. FX only) - Bucket examples for “Number of failing banks (shortfall in lowest two maturity buckets)” and related percent values: - All banks: less than one week and 27 20.0 27 20.0 27 27 27 27 27 - Maturity buckets include: less than one week and; 1 to 4 weeks; 1 to 3 months; 3 to 6 months; 6 months to 1 year; more than 1 year with example percent values like 20.0, 25.0, 33.3, 50.0, 60.0 depending on group breakdown. ### Appendix VII. Cash Flow–Based Liquidity Stress Tests — Advantages and Weaknesses - Advantages (cash flow–based tests vs. stock approaches such as the LCR): - Forward-looking by including banks’ contractual cash out- and inflows as well as banks’ expected counterbalancing capacity and should benefit from enhanced data availability and disclosure especially with regard to, for instance, asset encumbrance and securities funding such as repos or off-balance sheet funding. - Enable detailed liquidity analysis and hence is better suited for capturing a bank’s funding resilience and its liquidity risk bearing capacity compared to the rather limited stock approach (IMF, 2013b). - Better capture banks’ cumulative cash flows; standard measures follow a non-cumulative approach by focusing on a specific stress test window without accounting for other detailed maturity buckets (e.g., 30 days in the LCR case). - Provide a more detailed analysis of liquidity positions similar to those carried out by banks (often daily) for their internal risk management purposes. The cash flow approach incorporates securities flows and ensures consistency between cash flows and securities flows. - Allow for more granular maturity buckets (and may also be adapted to accommodate different currencies). - Integrate granular information on banks’ asset encumbrance levels from secured wholesale funding. - Accommodate off-balance sheet activities, such as FX swaps or credit liquidity lines, and banks’ behavioral cash out- and inflows, which might be more difficult in a standard stock approach. - Weaknesses: - High data intensity as well as initial set-up costs. - Key prerequisite: access to a wide range of data on contractual cash flows for different maturity buckets and possibly behavioral data based on banks’ financial/funding plans. - While banks typically use a cash flow-based approach for internal liquidity monitoring and liquidity stress testing, regulatory liquidity ratios are often based on stock accounting data with often less data granularity than the cash flow-based templates. - Footnote: For EU banks, the phase-in of cash flow-based maturity mismatch templates by the European Banking Authority (EBA) provides regulators and banks with standardized templates that would need to be regularly filled out and reported. *Source: Jobst (2017).* --- _Source: https://www.imf.org/-/media/files/publications/wp/2017/wp17102.pdf_