Integrated Stress Testing: Impact on Liquidity and Solvency

15 Pages Posted: 15 Apr 2013 Last revised: 28 Apr 2013

See all articles by Sanjay Basu

Sanjay Basu

National Institute of Bank Management

Date Written: March 25, 2013

Abstract

The global financial crisis has reminded us that effective stress tests should not only be probabilistic, but also consider risk interdependence. In this paper, we combine two hypothetical shocks, of varying degrees, with more than fifteen years of fortnightly data on deposits, borrowings and assets for the Indian banking sector. Our objective is to estimate the impact of stressed outflows on liquidity and solvency positions. We find that large shocks worsen existing short-term liquidity deficits. Moreover, the associated fall in book value of assets is more than the aggregate Common Equity Tier 1 Capital.

Keywords: Liquidity Risk, simulation models, Risk interactions, Capital adequacy

JEL Classification: C60, G13, G28

Suggested Citation

Basu, Sanjay, Integrated Stress Testing: Impact on Liquidity and Solvency (March 25, 2013). Available at SSRN: https://ssrn.com/abstract=2251024 or http://dx.doi.org/10.2139/ssrn.2251024

Sanjay Basu (Contact Author)

National Institute of Bank Management ( email )

Kondhwe Khurd, NIBM P.O.
Pune, WY Maharashtra 411048
India

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