February 06, 2019

ECB launched a sensitivity analysis of liquidity risk to assess the ability of the banks it directly supervises to handle idiosyncratic liquidity shocks. The exercise will constitute the supervisory stress test of 2019. ECB published a template for the sensitivity analysis of liquidity risk and the template is largely based on the Single Supervisory Mechanism (SSM) liquidity template. ECB also published frequently asked questions (FAQs) for the sensitivity analysis of liquidity risk.

ECB Banking Supervision will test adverse and extreme hypothetical shocks in which banks face increasing liquidity outflows. The exercise will focus on banks’ expected short-term cash flows to calculate the “survival period,” which is the number of days that a bank can continue to operate using available cash and collateral with no access to funding markets. The sensitivity analysis, which is expected to be completed in four months, will focus solely on the potential impact of idiosyncratic liquidity shocks on individual banks. It will not assess the potential causes of these shocks or the impact of wider market turbulence. The exercise will be carried out without any reference to monetary policy decisions.

The results will inform the supervisor about the relative vulnerability of banks to different liquidity shocks applied in the exercise and will also identify improvements needed in banks’ liquidity risk management. The results of the exercise will feed into the ongoing supervisory assessments of liquidity risk management frameworks of banks, including the Supervisory Review and Evaluation Process (SREP). However, the outcome of the stress test will not affect supervisory capital and liquidity requirements in a mechanical way. Banks’ individual results will be discussed bilaterally as a part of the supervisory dialog in the third quarter of 2019.

 

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Keywords: Europe, EU, Banking, Stress Testing, Liquidity Risk, Sensitivity Analysis, FAQ, SREP, SSM, ECB

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