A Framework for Systemwide Liquidity Analysis

By Xiaodan Ding, Dimitrios Laliotis, Priscilla Toffano

May 17, 2024

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Xiaodan Ding, Dimitrios Laliotis, and Priscilla Toffano. A Framework for Systemwide Liquidity Analysis, (USA: International Monetary Fund, 2024) accessed December 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

We developed a novel Systemwide Liquidity (SWL) framework to identify liquidity stress in the system that goes beyond banks and to assess the role played by non-bank financial institutions (NBFIs) in episodes of liquidity stress. The framework, which complements standard liquidity and interconnectedness analyses, traces the flow of liquidity among various agents in the economy and explores possible transmission channels and amplification mechanisms of correlated liquidity shocks. The framework uses unique balance sheet and asset encumbrance data to demonstrate the importance of assessing liquidity at the system level by allowing for (i) analyses of each agent’s contribution to liquidity stress, (ii) analyses of the impact of different behavioral assumptions (e.g., pecking order of collateral utilization, negative externalities of fire-sales and margin positions), and (iii) policy simulations. Since this framework covers a comprehensive set of financial instruments and transactions, it paves the way for harmonization of systemwide liquidity analysis across countries. We applied this general framework to Mexico in the context of the FSAP. Results for Mexico show that commercial banks safeguard the resiliency of the financial system by backstopping the liquidity needs of other agents. Moreover, certain sectors appear more vulnerable when binding regulatory liquidity constraints trigger risk-averse behavioral responses.

Subject: Asset and liability management, Commercial banks, Financial institutions, Financial regulation and supervision, Liquidity, Liquidity risk, Mutual funds, Securities

Keywords: Asset encumberance, Commercial banks, Derivative positions, Fire-sales, Global, Haircut, Liquidity, Liquidity analysis, Liquidity at risk, Liquidity constraint, Liquidity needs, Liquidity risk, Liquidity shock, Liquidity stress, Liquidity stress testing, Margin calls, Mutual funds, Net liquidity position, Nonbank financial institution, Repurchase agreement, Securities, Systemwide liquidity analysis

Publication Details

Pages:

51
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2024/104
Stock No:

WPIEA2024104
ISBN:

9798400277078
ISSN:

1018-5941

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