Liquidity by alicejenny

VIEWS: 10 PAGES: 27

									    Balance-Sheet Liquidity and
Approaches to Its Stress Testing
                                                      Koncepce likvidity


 „Liquidity is an elusive notion. It is easier to recognize than to define.“ (Crockett, 2008)



Několik základních definicí (např. BdF, FSR, 02/2008):
Bilanční likvidita (banky): schopnost banky dostát svým okamžitým
závazkům nebo Likvidita při financování se („funding“): jednoduchost,
s jakou je banka schopna získat zdroje k úhradě závazků např. z
externích zdrojů;
Tržní likvidita: schopnost trhu zobchodovat daný objem aktiv (cenných
papírů) bez významné změny jejich cen;
Měnová likvidita: se týká množství plně likvidních aktiv v bankovním systému
nebo množství peněz dodávaných centrální bankou komerčním bankám….
                     Různé definice, úzký vzájemný vztah
                                     Příklad: The crisis hit the Czech financial markets too


                                                                     OMO and currency in circulation
Market liquidity indicators for individual markets                   (in bil. CZK)
                                                                       450                                                                              35
    1.0
                                                                       400                                                                              30
    0.5

    0.0                                                                350                                                                              25


    -0.5                                                               300                                                                              20


    -1.0                                                               250                                                                              15


    -1.5                                                               200                                                                              10


    -2.0                                                               150                                                                              5


    -2.5                                                               100                                                                              0
                                                                         04/08     08/08   12/08       04/09      08/09      12/09      04/10   08/10
       2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
                                                                                                   Liquidity-absorbing repo operations
            FX market                         Stock market                                         Currency in circulation
            Money market                      Gov'ment bond market                                 Liquidity-providing repo operations (rhs)

Source: Bloomberg, CNB                                               Source: CNB




                • The market liquidity has rapidly fallen ….
                • The CNB introduced liquidity-providing repo operations aimed at
                  fostering the functioning of the government bond and money
                  market.
                                                                                                                                                   3
                                                   Příklad: Funding liquidity of the Czech banks still good


                                                                                          Ratio of deposits to loans granted in selected EU countries
Basic liquidity indicators of Czech banks                                                 (2009; %, deposits/loans to residents)
(in %)
                                                                                           160
 60                                                                                 200
 55                                                                                        140
                                                                                    190
 50
 45                                                                                 180    120
 40
                                                                                    170    100
 35
 30                                                                                 160     80
 25
                                                                                    150
 20                                                                                         60
 15                                                                                 140
                                                                                            40
 10
                                                                                    130
   5                                                                                        20
   0                                                                                120
    2004         2005          2006         2007     2008        2009        2010            0
                                                                                                 CZ SK PL ROBG HU SI LT EE LV         BE AT FR IT    UK SE DK       EA EU
         Liabilities on demand/total liabilities    Liquid assets/total assets
         Liquid assets/clients' deposits            Growth of primary deposits (yoy)
                                                                                          Source: ECB
         Deposits/Loans (rhs)
                                                                                          Note: EA = euro area; EU = average for all EU countries.
Source: CNB



 • Full coverage of the credit portfolio from client deposits that keep on growing
   (deposits exceed loans by 40%).
 • Excess deposits invested in liquid assets amounting to almost 30% of overall
   assets.
                                                                                                                                                                4
                                Funding liquidity in Basel III




Regulatory standards:
• Liquidity coverage ratio (LRC):
• Stock of high quality liquid assets / Net cashoutflows over
  a 30-day time period ≥ 100%
• Net stable funding ratio (NSFR) :
• Available amount of stable funding / Required amount of
  stable funding > 100%


                                                                 5
                                                  Funding liquidity in Basel III



Liquidity coverage ratio (LRC) - builds on traditional liquidity “coverage
   ratio” methodologies used internally by banks to assess exposure
   to contingent liquidity events:
• Net cumulative cash outflows for the scenario are to be calculated for 30 calendar
  days into the future. The value of the ratio should be no lower than 100% (i.e. the
  stock of liquid assets should at least equal the estimated net cash outflows).
• Banks are expected to meet this requirement continuously and hold a stock of
  unencumbered, high quality assets as a defense against the potential onset of
  severe liquidity stress.
• Banks and supervisors are also expected to be aware of any potential mismatches
  within the 30-day period and ensure that sufficient liquid assets are available to
  meet any cash-flow gaps throughout the month.
• In order to qualify as a „high-quality liquid asset“, assets should be liquid in markets
  during a time of stress and, ideally, be central bank eligible.


                                                                                    6
                             Liquid enough even according to the BCBS‘ QIS




Net stable funding ratio (NSFR): :
• “Stable funding” is defined as those types and amounts of equity and liability
  financing expected to be reliable sources of funds over a one-year time horizon
  under conditions of extended stress.
• The amount of such funding required of a specific institution is a function of the
  liquidity characteristics of various types of assets held, off-balance sheet contingent
  exposures incurred, and/or the activities pursued by the institution.
• The NSFR aims to limit over-reliance on wholesale funding during times of buoyant
  market liquidity and encourage better assessment of liquidity risk across all on and
  off-balance sheet items.
• In addition, the NSF approach would help to counterbalance the cliff-effects of the
  liquidity coverage ratio and offset incentives for institutions to fund their stock of
  liquid assets with short-term funds that mature just outside the supervisory defined
  horizon for that metric.

                                                                                   7
Despite the existing favorable position we test
  banks for liquidity-associated risks
Main objective: to investigate liquidity risk not only as a
  source of bank funding risk (the ability to raise cash to
  fund assets), but also as strong link to market liquidity
  (the ability to convert assets into cash at a given price).



                                                                8
                … a simple illustration of the lack of liquidity ...


       Promises from
          the past                 LIQUIDITY                  Uncertainty
                                  SHORTFALL                 about the future



                                     =
Assets = usage of funds                                Liabilities = funds

                       A bank must solve:
              A bank promised to lend (credit lines)
                              but
              may not have enough funding sources
              (even more impaired financial markets, withdrawals)
                                                                               9
          Banks` liquidity buffer vs. stressed cash outflows

Banks normally have liquidity reserves consisting of
liquid securities or cash to cope with unexpected cash
outflows.
Unexpected cash outflows (some examples):
• Loss of confidence in a bank,
• Frozen money markets,
• Withdrawals of deposits, or/and
• Drawdowns of credit lines.

The question is: Are banks` liquidity reserves sufficient
and liquid enough?

                                                               10
                                (1) A liquidity buffer is ample and liquid enough

• The difference between funding (liabilities) and illiquid assets (the blue rectangle) is
the funds invested in liquid assets (the red rectangle).
• Liquidity tension: (a) impossible banks‘ securities issuance, (b) withdrawals from
private individuals and (c) higher credit facilities usage.
• A bank with a larger liquidity reserves, a larger proportion of deposits and a smaller
proportion of securities that will mature over shorter notice…
                     …survives and its liquidity buffer is ample and liquid enough.

 The simple balance-sheet in the
            baseline                     Cash outflows according to scenarios The simple balance-sheet after shocks
    Assets          Liabilities                  Assets          Liabilities          Assets          Liabilities
                                               Liquid assets

   Liquid assets
                          Deposits
                                                                   Deposits
                                                                                                        Deposits



                                                                                    Illiquid assets
   Illiquid assets      Market funding        Illiquid assets
                                                                Market funding                        Market funding


                            Equity                                  Equity                               Equity
Source: Riksbank, CNB

                                                                                                                   11
                                 (2) The liquidity buffer is not sufficiently ample and liquid

   • The difference between funding (liabilities) and illiquid assets (the blue rectangle) is
   the funds invested in liquid assets (the red rectangle).
   • Liquidity tension: (a) impossible banks‘ securities issuance, (b) withdrawals from
   private individuals and (c) higher credit facilities usage.
   • A bank with a smaller proportion of deposits and higher dependence on market
   funding (a large proportion of securities that will mature over shorter notice)…
                                         … fully exhausts its liquidity reserves.

 The simple balance-sheet in the
            baseline                      Cash outflows according to scenarios The simple balance-sheet after shocks
    Assets          Liabilities                   Assets          Liabilities          Assets          Liabilities
                                                Liquid assets

   Liquid assets
                          Deposits
                                                                    Deposits


                                                                                                          Deposits

   Illiquid assets      Market funding         Illiquid assets                       Illiquid assets

                                                                 Market funding                        Market funding

                            Equity                                   Equity                                Equity
Source: Riksbank, CNB


                                                                                                                     12
           The current LST for the Czech banking system examine…


• Top-down approach originally developed by De Nederlandsche
  Bank with some CNB`s modifications.
• The 3-Phase Test captures the impact of both bank-specific and
  market wide scenarios and considers both the first- and second-
  round effects of shocks with a survival period of one month.
   • 1st phase (first-round effects): two dimensions:
       (a) a liquidity shortfall,            pressures on the
                                             initial liquidity
       (b) drying up of market liquidity,    buffer (LB)
   • 2nd phase: reactions by banks to mitigate shocks and
     restore LB,
   • 3rd phase: negative reputational impacts and collective
     behavior (second-round effects) – the feedback effects of
     shocks – some additional impact on LB.

                                                                    13
                         … whether Czech banks are being able to survive arisen
                         liquidity tension.


                              Flow chart for liquidity stress test
                                                                             Liquidity shortfall
Liquidity buffer (LB0)          Scenario             1st round effects
                                                                             Liquidity buffer (LB1)
                                  1st
                          Liquidity buffer (LB2)              Mitigation     Reaction by banks
                                                            2nd
                                                                                    Reputation risk
                                                                            3rd
                                                                                  Collective
                                                                                  behavior


                                                   Liquidity buffer (LB3)          2nd round effect

Source: Modified from Van den End, J. W. (2008)


                                                                                                14
                  Initial liquidity buffer

     Starting point - liquidity buffer (LB0) as the first line of defense


         LIQUID ASSETS (LB)
                                             Liquidity buffer (LB):
1.    CASH
                                             •   Banks` holdings of liquid
2.    CLAIMS on CEBs                             assets in case of unexpected
                                                 tensions in its balance-sheet;
      CLAIMS on other clients (non-          •   Definition: sum of
3.    financial, financial) on demand and
      due within 1 month                         unweighted liquid assets
                                                 (initial level of banking
4.    BONDS (bills) issued by government         system assets under normal
                                                 conditions).
5.    BONDS (bills) issued by CEBs

                                                                            15
                      Scenarios‘ impact

        Scenario ==> 1st round effect ==> LIQUIDITY SHORTFALL, ↓ LB

                            Scenario type and shock size in banks' liquidity stress test
1st  round of shocks:       Scenario type (in %)                                        Scenario1 (2)
• first three items above   Outflow of deposits according to ROA after credit and
                                                                                    (banks' avrg) 5 (10)    source of
are affected at once;       market shocks
                                                                                                             liquidity
• two premises are          Autonomous credit growth
                            Drawdown of credit lines
                                                                                                   2 (0)
                                                                                                20 (10)
                                                                                                             shortfall
linked to credit and        Reduction in value of assets sold before maturity
market shocks.              according to risk costs (PD x LGD)
                                                                                  (banks' avrg) 30 (50)

                            Share of short-term claims on banks that will become
                                                                                               50 (100)
Liquidity shortfall:        unavailable
                                                                                                            conditions
difference between the      Share of short-term claims on non-banks that will
                                                                                                20 (30)    under which
amount of the aftershock    become unavailabe
                                                                                                              banks
assets and liabilities;     Reduction in value of government bonds eligible as
                            collateral in CNB liquidity-providing operations
                                                                                                20 (30)      reacted
                            Reduction in value of other securities                              20 (40)
Banks` reaction: sales      No additional interbank funds
of assets under             No additional securities issuance is available
restrictive conditions.     Source: CNB, CNB calculation




                                                                                                             16
                Dependence on macro stress testing

LST takes into account the results of the credit and market
risk stress testing:
• The higher losses the greater outflow of liquidity,
• The less quality the higher haircuts.
        Dependence of selected liquidity shocks on estimated bank
        balance-sheet indicators in the stress tests
                                                           Bank run
         Estimated RoA in 2011 (%)
                                     Asymmetric Developments         Renewed Recession
                    < -2%                     10%                           15%
                 -2% – -1%                     8%                           13%
                  -1% – 0%                     6%                           11%
                   0% – 1%                     4%                           9%
                  1% – 2%                      2%                           7%
                    > 2%                       0%                           5%
         Estimated risk costs 2011     Reduction in value of assets sold before maturity
                     (%)             Asymmetric Developments         Renewed Recession
                  < 1%                        10%                           25%
                 1% – 2%                      30%                           45%
                 2% – 3%                      40%                           55%
                  > 3%                        50%                           65%
        Source: CNB, CNB calculation
                                                                                           17
         Liquidity shortfall



A. Deposit outflows:
    not all deposits are guaranteed,
    fixed costs to extracting deposits from banks,
    an insufficiency of the insurance funds…


B. The increase of the banks` loan portfolio:
    the drawdown on credit lines,
    the loss of confidence.




                                                      18
               Mitigate the impact of shocks

LIQUIDITY SHORTFALL ==> Reactions by banks ==> Mitigate 1st round
               effects ==> ↓Liquidity buffer (LB1)

Reaction: banks can reduce assets only due to constrains
   on funding (the liability side can not be increased):

(a) banks first liquidate the initial liquidity buffer (the most liquid
    assets) reflecting market liquidity, their specialization and
    their strength of presence in financial markets – cash, claims
    on CEBs, sovereign bonds…),
(b) and then the other items (run out of liquidity buffer) – high
    haircuts.


                                                                      19
                … a simple illustration of banks‘ reactions...


Market dilemma:
(a) Reputation risk: …Why is that
    bank selling?  Stigma                   Selling more
(b) Systemic risk: …too many                  for lower
    banks are selling, the same                  price
    assets…                                                      Assets




        PRICE
       DECLINE
                                   NO PRICE                          20
               Impact of the 2nd round of shocks

Reactions by banks ==> Loss of reputation and collective behavior ==>
        2nd round effects (feedback) ==> ↓Liquidity buffer (LB3 )

The behavioural reactions have wider disturbing effects on markets and
feeding back on the banks  additional haircuts on assets and
withdrawals of liabilities. The feedback effect is stronger for reacting
banks.

• Loss of reputation: signalling effect;
• Systemic risk (collective reaction) depends on:
        (i) the number of reacting banks,
        (ii) the similarity of the banks‘ reaction, and
        (iii) the size of reacting banks;
• Market conditions: reaction on liquid and developed versus illiquid and
shallow markets.

                                                                      21
                    Scenarios
                    CNB‘s FSR 2010/2011 (data at the end of 2010)

• The same scenarios as for macro stress testing (Asymmetric Developments,
Renewed Recession).
• The Renewed Recession scenario would cause liquidity problems, but these
would not be systemic in nature.

           Scenario type and shock size in the bank liquidity test
                                                                    Asymmetric    Renewed
                             Scenario type
                                                                   Developments   Recession
           Bank run (average for banks, %)                               5           10
           Drawdown of credit facilities (credit lines, % of
                                                                        20           10
           volume)
           Share of short-term claims on banks that will
                                                                        50           100
           become unavailable (%)
           Share of short-term claims on other clients that will
                                                                        20           30
           become unavailable (%)
           Reduction in value of government bonds eligible
           as collateral in CNB liquidity-providing operations          20           30
           (%)
           Reduction in value of other securities (%)                   20           40
           Reduction in value of assets sold before maturity
                                                                        30           50
           (average for banks, %)
           Source: CNB, CNB calculation
                                                                                              22
                                    Results
                                    CNB‘s FSR 2010/2011 (data at the end of 2010)
Results of the liquidity test
(%; share in original total assets)
                                                                                            • The tested banks withstood
  45
                                                                                              the simulated stress and
  35
                                                                                              would be able to close the
  25                                                                                          potential liquidity gap within
  15
                                                                                              one month even under
                                                                                              worsened market conditions.
    5
                                                                                            • Only a few banks would fully
   -5
                                                                                              exhaust their liquidity buffers
  -15                                                                                         by their response to the
          Large banks       Medium-sized
                               banks
                                           Small banks                Building
                                                                      societies               liquidity shock.
        LB0     Gap          LB2         Feedback effect                LB3

Source: CNB, CNB calculation
Note: The first column of each pair of identically coloured columns expresses the
value for the Asymetric Developments scenario and the second expresses that for the
Renewed Recession scenario. Gap = liquidity gap. Feedback effect = additional
stress caused by banks reactions in markets. LB0 = initial liquidity buffer; LB2 = buffer
after first round of shocks; LB3 = final liquidity buffer.


                                                                                                                           23
             Zátěžové testy likvidity dopadly rovněž uspokojivě

• Metodologie shodná jako v minulém období (dvě kola šoků, šoky
  navázány na výsledky bank v testech solvence), nově však
  provedeny separátně pro jednoměsíční a tříměsíční horizont.
• Likviditní polštář by se v        Výsledky testu likvidity
  průměru snížil o dvě třetiny, v   (%, podíl na celkových aktivech)

  segmentu stavebních                40

  spořitelen by v případě            35

  tříměsíčního horizontu klesl o     30

  více než 80 %.                     25

• Jedna banka (v případě 3M


                                                            38,28




                                                                                                                            37,45
                                     20



                                            35,57




                                                                                                            34,57
                                                                                            32,44
  horizontu dvě banky) by



                                                                             28,22
                                     15




                                                                                                                                                           22,13
                                                                                                                                            20,41
  zcela vyčerpala likviditní         10




                                                                                                                                    14,67
                                                                                                                    13,79
                                                                    12,35
                                                    11,50




                                                                                                    10,21
  polštář.


                                                                                     8,96




                                                                                                                                                    7,42
                                      5




                                                                                                                                                                   3,81
                                      0
                                           Velké banky                      Střední banky                   Malé banky              Stavební
                                                                                                                                    spořitelny
                                                    Počáteční LB_1M                                                     LB po zátěži_1M
                                                    Počáteční LB_3M                                                     LB po zátěži_3M
                                    Pramen: ČNB, výpočet ČNB
                                    Pozn.: LB = likviditní polštář; 1M = jednoměsíční; 3M = tříměsíční.
                                                                                                                                                                   24
             Riziko likvidity – banky vs. stavební spořitelny

• V oblasti likvidity je patrný významný rozdíl vyplývající ze specifického
  obchodního modelu stavebních spořitelen.
                                  Nesoulad splatností úvěrů a vkladů: netto rozvahová
• U stavebních spořitelen je      pozice bank a stavebních spořitelen
                                  (v poměru k bilanci, v %, březen 2012)
  nesoulad splatností úvěrů a
  vkladů výraznější než ve         40

  zbytku bankovního sektoru –      30
                                   20
  platí to zejména z pohledu       10
  dlouhodobých pohledávek se        0
  splatností nad 5 let.            -10

• Podíl rychle likvidních aktiv
                                   -20
                                   -30
  na aktivech se u stavebních      -40
  spořitelen v roce 2011 dále      -50
  snížil na úroveň kolem 15 %      -60

  a zůstává tak významně nižší              Banky bez
                                            stavebních
                                                            Stavební spořitelny    Bankovní sektor
                                                                                     jako celek
  než u ostatních bank.                      spořitelen
                                         Do 3 měsíců       Nad 3 měsíce do 5 let         Nad 5 let
                                  Pramen: ČNB
                                  Pozn.: Graf obsahuje i pobočky zahraničních bank.            25
                     …for potential uses
                                                                                                                                                                                Variables

Main formulas:
                                                                                                                                                    LB 0       Initial liquidity buffer
                                                                                                                                                    I          Liquid balance-sheet assets
                                                                                                                                                    i          Items

1) An initial liquidity buffer: LB   I                                 0
                                                                                     4


                                                                                    i 1
                                                                                               i
                                                                                                                                                    R1
                                                                                                                                                    L
                                                                                                                                                               Liquidity shortfall
                                                                                                                                                               Banks' loan portfolio

2) A liquidity shortfall: R  L * p  C * dr  D  r
                                                                                                                                                    p          Autonomous credit growth
                                                   1                                                                                                C          Credit lines
                                                                                                                                                    dr         Drawdown rate of committed credit lines

3) An available liquidity buffer: LB   I                                                                                                          D          Deposits
                                                                                                            5

                                                                                               1                   B0    * hi                       r          Deposit withdrawal rate
                                                                                                           i 1
                                                                                                                                                    LB 1       Available liquidity buffer
4) Banks` reactions:  I  p  R 
                                            n

                                                       B, j       1, j              1
                                                                                                                          R1  0                    h          Haircuts for liquid assets
                                            j 1                                                                                                    j          Number of assets liquidated
                                                                                                                                                    R2         Second round of shocks
                                                                                                                                                    LI         Amount of particular asset liquidated

For non-reacting banks                                                                                                                              q
                                                                                                                                                    s
                                                                                                                                                               Number of reacting banks
                                                                                                                                                               Market conditions
                                                            
                                          R    I  p   R    p                                                                              p1, j 
                                                                                                                   n

1) The second round of shocks:                
                                              
                                                           
                                                              
                                                               
                                                                                                   2
                                                                                                                  j 1
                                                                                                                          B, j   1, j   1   2, j


                                                 
2) Haircuts:   p  p    q 1   LI /   LI   s  /  q
                       
                      2, j
                       
                             
                             
                               1, j
                                        B
                                                   
                                                   
                                                            B
                                                                             B, j
                                                                                           j           B
                                                                                                                  B, j
                                                                                                                                 B




For reacting banks
                                                                                                         n                       
                                                                                                   R3    I B , j  p1, j   R1    p3, j  p1, j 
1) The second round of shocks:                                                                          
                                                                                                         
                                                                                                         j 1
                                                                                                                             
                                                                                                                                   
                                                                                                                                    

2) Haircuts: p  p  s  3, j     2, j




                                                                                                                                                                                            26
                  Relevant literature
•   Van Den End, J. W. (2008): Liquidity Stress-Tester: A macro model for stress-testing
    banks‘ liquidity risk, Dutch National Bank, WP No. 175 (May).
•   IMF (2011): Global Financial Stability Report, Chapters 2 – Liquidity Risk: How to
    Address the “Systemic” Part (March).
•   Barnhill, T., Schumacher, L. (forthcoming): Modeling Correlated Systemic Liquidity
    and Solvency Risks in a Volatile Environment with Incomplete Information, IMF WP.
•   Wong, e., Hui, C.H. (2009): A Liquidity Risk Stress-Testing Framework with
    Interaction between Market and Crecit Risks, Hong Kong Monetary Authority, WP
    06/2009 (March).
•   Aikmen, D., Piergiorgio, A., Eklund, B., Gai, P., Kapadia, S., Martin, E., Mora, N., Sterne
    G., Willison, M. (2009): Funding Liquidity Risk in a Quantitative Model of Systemic
    Stability, Bank of England, WP No. 372 (June).
•   Riskbank (2010): Financial Stability Report, 2/2010.
•   Van Den End, J. W. (2010): Liquidity Stress-Tester: Do Basel III and Unconventional
    MP Work?, Dutch National Bank, WP No. 269 (December).
…
•   Adrian, T., Shin, H. S. (2009): Money, Liquidity, and MP, FED of NY, Staff Reports No. 360 (January).
•   Cifuentes, R., Shin, H. s., Ferrucci, G. (2005): Liquidity Risk and contagion, Journal of the European
    economic association, (April-May).
•   Brunnermeier, M., Pedersen, L. H. (2009): Market Liquidity and Funding Liquidity, Review of Financial
    Studies, 22(6), p. 2201-2238.
•   Praet, P., Herzberg, V. (2008): Market liquidity and banking liquidity: linkages, vulnerabilities and the
    role of disclosure, FSR – Special issue on liquidity, Banque de France, No. 11.
•   Adrian, T., Shin, H. S. (2008): Liquidity and financial contagion, FSR – Special issue on liquidity,
    Banque de France, No. 11.
•   Nikolaou, K. (2009): Liquidity (risk) concepts: definitions and interactions, ECB WP No. 1008 (Feb.). 27
…

								
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