Banks’ Joint Exposure to Market and Run Risk
IMF Working Papers, September 22, 2023
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Bibliographic details
- Authors: Alexander Copestake, Divya Kirti, Yang Liu
- Published: September 22, 2023
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798400253966.001
Overview and authorship
- Title: Banks’ Joint Exposure to Market and Run Risk
- Authors: Alexander Copestake, Divya Kirti, Yang Liu
- Publication date: September 22, 2023
- Series: IMF Working Papers, Working Paper No. 2023/200
- Pages: 26
- Volume: 2023
- Issue: 200
- DOI: https://doi.org/10.5089/9798400253966.001
- Stock No: WPIEA2023200
- ISBN: 9798400253966
- ISSN: 1018-5941
- Subjects: Bonds; Financial institutions; Financial regulation and supervision; Market risk; Public debt; Securities; Sovereign bonds
- Keywords: bank assets; bank data; Banks; Bonds; deposit franchise; Global; Liquidity Risk; low-COF bank; Market risk; Securities; securities holding; Solvency Risk; solvency risk interact; Sovereign bonds
Key findings
- Recent failures of US banks illustrate that large liability withdrawals can damage capital positions, i.e., liquidity risk and solvency risk interact.
- A simple risk assessment across a wide group of countries finds sizable exposure to the interaction between market risk and run (liquidity) risk.
- Cross-bank variation in exposure is significant and primarily reflects differences in:
- cash buffers,
- capitalization,
- securities holdings,
- exposure to market risk.
- Exposure is highly concentrated across banks rather than uniformly distributed.
- Vulnerability is generally greater for banks in advanced economies (AEs) due to:
- lower cash buffers,
- lower securities holdings,
- lower capitalization.
- Within AEs—unlike in emerging markets (EMs)—larger banks are most exposed, driven by:
- greater wholesale funding,
- thinner capital buffers.
- Estimated aggregate losses are substantial in some countries, reflecting a range of recent shocks.
Analysis and implications
- Interaction channel: Large liability withdrawals can force asset realizations or mark-to-market losses that erode capital, linking liquidity shocks to solvency outcomes.
- Heterogeneity matters: Bank-level characteristics (cash, capital, securities, market-risk exposure) are the primary determinants of joint vulnerability.
- Concentration risk: Because exposures are highly concentrated, a limited set of institutions may drive systemic vulnerability in a country.
- AE vs EM differences: Structural funding and buffer differences imply different vulnerability patterns; policy responses may need to be tailored accordingly.
- Loss magnitudes: The paper reports substantial estimated aggregate losses in some countries driven by diverse recent shocks (no numeric loss figures are specified on the page overview).
Policy-relevant takeaways
- Monitoring should integrate liquidity and market-risk channels to capture joint solvency–liquidity vulnerability.
- Supervisory focus should prioritize banks with low cash buffers, thin capital, large securities holdings sensitive to market risk, and high wholesale funding reliance.
- Macroprudential assessments should account for concentration of exposure across banks to identify systemically important vulnerabilities.
- Differences between AEs and EMs warrant country-specific calibration of liquidity and capital requirements, and stress-testing frameworks should reflect the observed interaction between runs and market losses.
IMF Working Paper No. 2023/200, "Banks’ Joint Exposure to Market and Run Risk," Alexander Copestake, Divya Kirti, Yang Liu.
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- Working Paper