Liquidity Stress-Tester: A Model for Stress-testing Banks Liquidity Risk

This article presents a stress-testing model for liquidity risks of banks. It takes into account the first- and second-round (feedback) effects of shocks, induced by reactions of heterogeneous banks, and reputation effects. The impact on liquidity buffers and the probability of a liquidity shortfall is simulated by a Monte Carlo approach. An application to Dutch banks illustrates that the second-round effects in specific scenarios could have more impact than the first-round effects and hit all types of banks, indicative of systemic risk. This lends support policy initiatives to enhance banks liquidity buffers and liquidity risk management, which could also contribute to prevent financial stability risks. (JEL Codes: C15, E44, G21, G32).