Posted

August 28, 2012 12:30:58 AM

Date

2012-08

Author

Andreas Jobst

Affiliation

Money and Capital Markets Department, IMF

Title

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

Summary /
Abstract

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.

Keywords

Systemic risk, liquidity risk, Net Stable Funding Ratio (NSFR), extreme value theory, financial contagion, macroprudential regulation.

URL

http://www.imf.org/external/pubs/ft/wp/2012/wp12209.pdf

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