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

 
Author/Editor: Cihák, Martin ; Ong, Li
 
Publication Date: July 01, 2010
 
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate
 
Summary: The global financial crisis revealed weaknesses in the stress testing exercises performed on financial institutions and systems around the world. These failures were most evident in the area of liquidity risk, where now-obvious vulnerabilities were left largely undetected, with stress tests having largely focused on solvency risk. This paper uses publicly available data from a now-defunct bank in Iceland, where liquidity shocks were immense, to demonstrate how a combination of stress tests of the various risks would have provided a clearer picture of existing vulnerablities. We show that, ultimately, stress test models do not necessarily need to be complex or overly sophisticated. Basic stress tests, using appropriate assumptions and shocks, could reveal key areas of risk to inform contingency planning. The liquidity stress test templates used in this paper are included.
 
Series: Working Paper No. 10/156
Subject(s): Liquidity | External shocks | Iceland | Stress testing

 
English
Publication Date: July 01, 2010
ISBN/ISSN: 9781455201396 Format: Paper
Stock No: WPIEA2010156 Pages: 35
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