The Study Of Banking Liquidity Stress Testing Based On Macro-prudential Supervision

The International financial crisis from2008reveals that liquidity risk has anobvious contagion effect. The liquidity run of a single bank could trigger a chainreaction of other banks. It is more likely to cause systemic risk when the “trouble”bank is highly correlated with other financial institutions. Therefore, efficientliquidity risk supervision is essential for the steady operation of a single bank as wellas the security and stability of the banking system as a whole.The dissertation reviews the new trend of liquidity risk supervision after thecrisis and finds out that: International regulatory authorities begin to explore theframework of macro-prudential supervision, and liquidity regulation should base onthat. The new mode will focus on the liquidity run problem causing by the shock ofmacroeconomic factors, and contagion and feedback effects among banks andinter-bank market should be considered. The promulgation of “Basel Accod Ⅲ”indicates that: the supervision of banking liquidity risk will move towards to moremeasurable and feasible trend. In this process, liquidity stress test is an important toolfor the analysis and evaluation of liquidity risk, and also an important premise forimplementing liquidity regulation.The liquidity stress test method can help banks assess liquidity supply anddemand in extreme conditions and make emergency plan immediately, so it attractsmore and more attention. According to the present situation in China, domesticcommercial banks tend to take sensitivity analysis rather than scenario test. Becausethe scenario design is usually too simple or casual, and the scenario often notconnects with the macro-economic and financial market environment, which leads tothe stress test often to be mere formalism.Regard of this, the dissertation develops a liquidity stress test model, focuses onliquidity runs of banking industry under the shock of macro-economic factors. Firstly,we calculate the change of banks’ PD under the stress scenarios by using KMV model,and then we derive the relationship between banks’ PD and the outflow of commercialbanks’ demand deposit. Compared to the current way in which parameters are givenarbitrarily and randomly, our approach will be more reasonable and feasible. Thedissertation takes Chinese listed banks as a sample for empirical analysis, the resultsshow that liquidity maturity mismatch phenomenon is very obvious in Chinesebanking system, and some commercial banks have higher liquidity pressure in short term.Macro-prudential supervision focuses on the contagion effect of inter-bankliquidity risk; therefore, this dissertation also considers of that. In recent years,Chinese inter-bank market has developed rapidly, and it has become not only the mainplace for inter-bank liquidity position exchange, but also a significant medium forliquidity risk contagion. The dissertation takes empirical research on liquidity riskinfection in China’s inter-bank market and finds out that: the transaction volume ininter-bank market will be rapidly declined when the banking system suffered an largescale liquidity shock and it is difficult to recover to the former level; while under amiddle or small scale shock, the liquidity risk is convergent, the transaction volume inthe market will gradually restored to a steady status. This shows that, it is necessaryto implement more prudent liquidity supervision on systemic important banks.Macro-prudential supervision covers not only the measurement and evaluation ofliquidity risk, but also the crisis bailout and treatment mechanism after the outbreakof the liquidity risk. As for liquidity bailout, there exist many controversies. Thedissertation studies the practices in this financial crisis, and finds that systemic riskprevention is the main factor when the government decides whether or not to provideliquidity bailout, which causes more concern than moral hazard. Because of its dualfunctions of both maintaining financial stability and supplying liquidity for thebanking system, the central bank is in the dominate position when implementing thebanking liquidity bailout. On the basis, this dissertation discusses the construction ofliquidity bailout mechanisms, including the discrimination of object for liquiditybailout, the selection of bailout methods, the use of constructive ambiguity and theexit mechanism of liquidity bailout.To enhance the prudential supervision of liquidity risk, the regulatory authorityneed to establish a liquidity risk regulatory regime that combining macro-prudentialand micro-prudential supervision. In the macro-level, the authority should improverisk regulation strategy, establish macro stress test system, improve monetary policyand liquidity crisis coping mechanism. In the micro-level, bank should improve riskmanagement framework, enhance loan-and-deposit structure, quantize liquidity riskby stress test and take necessary emergency plan.