A Framework for Systemwide Liquidity Analysis
IMF Working Papers, May 17, 2024
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- A Framework for Systemwide Liquidity Analysis
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Bibliographic details
- Authors: Xiaodan Ding, Dimitrios Laliotis, Priscilla Toffano
- Published: May 17, 2024
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798400277078.001
Framework overview
- Novel Systemwide Liquidity (SWL) framework developed to identify liquidity stress that extends beyond banks and to assess the role played by non-bank financial institutions (NBFIs) in episodes of liquidity stress.
- Complements standard liquidity and interconnectedness analyses by tracing the flow of liquidity among various agents in the economy.
- Explores possible transmission channels and amplification mechanisms of correlated liquidity shocks.
Methodology and data
- Uses unique balance sheet and asset encumbrance data to assess liquidity at the system level.
- Allows analyses of:
- each agent’s contribution to liquidity stress;
- the impact of different behavioral assumptions (for example, pecking order of collateral utilization; negative externalities of fire-sales and margin positions);
- policy simulations.
- Covers a comprehensive set of financial instruments and transactions to support harmonization of systemwide liquidity analysis across countries.
Application and key findings (Mexico FSAP)
- Framework applied to Mexico in the context of the FSAP.
- Findings for Mexico:
- Commercial banks safeguard the resiliency of the financial system by backstopping the liquidity needs of other agents.
- Certain sectors appear more vulnerable when binding regulatory liquidity constraints trigger risk-averse behavioral responses.
Policy implications and uses
- Enables assessment of the role of NBFIs in episodes of liquidity stress and the transmission of liquidity shocks across agents.
- Supports policy simulations to evaluate the effects of regulatory liquidity constraints and behavioral responses such as fire-sales and margin calls.
- Paves the way for harmonization of systemwide liquidity analysis across countries given its comprehensive coverage of instruments and transactions.
Keywords and subject areas
- Subject: Asset and liability management, Commercial banks, Financial institutions, Financial regulation and supervision, Liquidity, Liquidity risk, Mutual funds, Securities
- Keywords: asset encumberance, Commercial banks, derivative positions, fire-sales, Global, haircut, Liquidity, liquidity analysis, liquidity at risk, liquidity constraint, liquidity needs, Liquidity risk, liquidity shock, liquidity stress, liquidity stress testing, margin calls, Mutual funds, net liquidity position, nonbank financial institution, repurchase agreement, Securities, Systemwide liquidity analysis
Content in this bundle
- Working Paper