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Keywords = asset encumbrance

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15 pages, 2923 KiB  
Article
A Liquidity Shortfall Analysis Framework for the European Banking Sector
by Oana-Maria Georgescu, Dimitrios Laliotis, Miha Leber and Javier Población
Mathematics 2020, 8(5), 787; https://doi.org/10.3390/math8050787 - 13 May 2020
Cited by 1 | Viewed by 3676
Abstract
This paper presents an analytical framework for the identification of vulnerabilities arising from the liquidity and funding profile of banks. It is composed of two pillars—estimation of liquidity needs and the counterbalancing capacity of the total liquid assets—that determine a liquidity surplus or [...] Read more.
This paper presents an analytical framework for the identification of vulnerabilities arising from the liquidity and funding profile of banks. It is composed of two pillars—estimation of liquidity needs and the counterbalancing capacity of the total liquid assets—that determine a liquidity surplus or shortfall and the drivers for a range of plausible scenarios. Granular bank-level data on the structure of liabilities, maturation profile, liquid assets quality composition, and asset encumbrance are used for that purpose, also taking into account associated commonality effects. A new liquidity metric is introduced—the distance to liquidity stress indicator (DLSI)—which measures the required stress factor for banks to become illiquid. The novelty of the approach (i.e., taking into account asset encumbrance to determine counterbalancing capacity) provides empirical evidence that asset encumbrance has a significant impact on a bank’s liquidity position, leading to the non-linear behavior of liquidity shortfalls, even in the case of linear stress factors. Full article
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