Measuring Systemic Risk-Adjusted Liquidity (SRL): A Model Approach

August 1, 2012

Preview Citation

Format: Chicago

Andreas Jobst. Measuring Systemic Risk-Adjusted Liquidity (SRL): A Model Approach, (USA: International Monetary Fund, 2012) accessed December 3, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Little progress has been made so far in addressing—in a comprehensive way—the externalities caused by impact of the interconnectedness within institutions and markets on funding and market liquidity risk within financial systems. The Systemic Risk-adjusted Liquidity (SRL) model combines option pricing with market information and balance sheet data to generate a probabilistic measure of the frequency and severity of multiple entities experiencing a joint liquidity event. It links a firm’s maturity mismatch between assets and liabilities impacting the stability of its funding with those characteristics of other firms, subject to individual changes in risk profiles and common changes in market conditions. This approach can then be used (i) to quantify an individual institution’s time-varying contribution to system-wide liquidity shortfalls and (ii) to price liquidity risk within a macroprudential framework that, if used to motivate a capital charge or insurance premia, provides incentives for liquidity managers to internalize the systemic risk of their decisions. The model can also accommodate a stress testing approach for institution-specific and/or general funding shocks that generate estimates of systemic liquidity risk (and associated charges) under adverse scenarios.

Subject: Asset and liability management, Banking, Financial regulation and supervision, Financial sector policy and analysis, Liquidity, Liquidity management, Liquidity requirements, Liquidity risk, Systemic risk

Keywords: Central bank, Extreme value theory, Fair value, Financial contagion, Global, III liquidity framework, Insurance guarantee fee, Liquidity, Liquidity management, Liquidity requirements, Liquidity risk, Liquidity shortfall, Macroprudential regulation, Net Stable Funding Ratio (NSFR), Option pricing, Private sector liquidity, Put option, Systemic risk, U.S. dollar, WP

Publication Details

Pages:

69
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2012/209
Stock No:

WPIEA2012209
ISBN:

9781475505597
ISSN:

1018-5941

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