## Of Runes and Sagas: Perspectives on Liquidity Stress Testing Using an Iceland Example

_IMF Working Papers, July 1, 2010_

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## Bibliographic details
- Authors: Martin Cihak, Li L Ong
- Published: July 1, 2010
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781455201396.001

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### Summary
- The global financial crisis revealed weaknesses in stress testing exercises performed on financial institutions and systems, particularly in the area of liquidity risk.
- The paper uses publicly available data from a now-defunct bank in Iceland, where liquidity shocks were immense, to demonstrate how combined stress tests of various risks would have provided a clearer picture of existing vulnerabilities.
- The authors argue that stress test models do not need to be complex or overly sophisticated; basic stress tests with appropriate assumptions and shocks can reveal key risk areas to inform contingency planning.
- The liquidity stress test templates used in the paper are included.

### Key findings and observations
- Stress tests prior to the crisis largely focused on solvency risk and left liquidity vulnerabilities largely undetected.
- A combination of stress tests covering various risks would have provided a clearer picture of vulnerabilities in the Icelandic bank example.
- Basic stress testing approaches, when using appropriate assumptions and shocks, can identify critical areas for contingency planning without requiring highly complex models.

### Methodology and materials
- Analysis relies on publicly available data from a now-defunct Icelandic bank (Landsbanki Íslands referenced in keywords).
- Liquidity stress test templates used in the paper are included with the publication.

### Policy implications and recommendations
- Implement combined stress testing frameworks that explicitly include liquidity risk alongside solvency assessments.
- Use appropriate assumptions and shocks in basic stress testing models to identify key vulnerabilities and inform contingency planning.
- Ensure stress testing exercises are sufficiently broad to detect liquidity shocks similar to those experienced by the Icelandic bank examined.

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/of-runes-and-sagas-perspectives-on-liquidity-stress-testing-using-an-iceland-example-24019_