Search Options
Home Media Explainers Research & Publications Statistics Monetary Policy The €uro Payments & Markets Careers
Sort by

FAQs for the sensitivity analysis of liquidity risk – 2019 stress test

Why is ECB Banking Supervision conducting a sensitivity analysis of liquidity risk as its 2019 stress test?

ECB Banking Supervision is required to organise annual supervisory stress tests (under Article 100 of the Capital Requirements Directive IV) and will conduct such an exercise for banks under its direct supervision in 2019.

This year’s exercise is designed to provide the ECB with sufficient information to understand how supervised banks can handle hypothetical idiosyncratic liquidity shocks. Although liquidity has been abundant in the euro area in recent years, we have witnessed individual cases of constrained liquidity and we need to test whether banks are ready to handle similar situations.

The results of the exercise will feed into our ongoing supervisory assessments of banks’ liquidity risk management frameworks, including the Supervisory Review and Evaluation Process (SREP). However, the outcome of the stress test will not affect supervisory capital and liquidity requirements in a mechanical way.

We will perform in-depth analyses of certain aspects of banks’ liquidity management, for instance the ability to mobilise collateral and the exposure to liquidity mismatches in individual currencies.

What type of information will banks report to the ECB?

Banks will report information on cash flows expected over a six-month time horizon. They will also report data on their collateral position. Banks will be able to leverage on existing reporting to comply with the above information requests. The template for the sensitivity analysis of liquidity risk is largely based on the Single Supervisory Mechanism (SSM) liquidity template, which is used by supervisors across the SSM for the high-frequency monitoring of the liquidity position of banks. Once a year, all significant institutions are requested to submit their filled-in SSM liquidity template during the course of five consecutive days.

Information on expected cash flows and collateral is a useful complement of regulatory liquidity indicators: the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR). The LCR requires that banks hold a sufficient reserve of high-quality liquid assets to allow them to survive a period of significant liquidity stress lasting 30 calendar days. The NSFR – which is not yet a minimum requirement in the EU – is designed to ensure that banks maintain a stable funding profile in relation to the composition of their assets and off-balance sheet activities.

What are the assumptions for changes in banks’ liquidity situations in this exercise?

We will be testing the sensitivity of banks’ liquidity position to idiosyncratic shocks, informed by past experience. The hypothetical idiosyncratic shock could take the form of, for example, deposit outflows observed in the past for institutions, losses of liquidity related to rating downgrades or the withdrawal of committed liquidity facilities.

We will not simulate the impacts of a market-wide shock on banks’ funding or of significant changes in asset prices. The exercise will be carried out without any reference to monetary policy decisions.

Will the results of the exercise be integrated into the SREP?

The results will inform the 2019 SREP assessment of banks’ risks. The exercise will also allow supervisors to assess the robustness of banks’ risk governance frameworks, for example their ability to deliver timely and accurate results in practice. Supervisors will discuss the individual results with banks.

Will the exercise lead to higher supervisory capital or liquidity requirements for banks?

The quantitative results will not affect supervisory capital or liquidity requirements in the 2019 SREP decision in a mechanical way. The results will inform the supervisor about the relative vulnerability of banks to different liquidity shocks applied in the exercise and will also identify improvements needed in banks’ liquidity risk management.

Who is conducting the stress test and how long will it last?

As for the 2017 stress test (an ECB sensitivity analysis of interest rate risk in the banking book), the 2019 liquidity stress test will be run by a centralised team led by ECB Banking Supervision, in cooperation with supervisors from national competent authorities. The exercise is expected to run for four months. The results will be discussed as part of the SREP supervisory dialogue between banks and Joint Supervisory Teams in the summer.


European Central Bank

Directorate General Communications

Reproduction is permitted provided that the source is acknowledged.

Media contacts