Liquidity is a top risk measured and monitored by individual financial institutions and prudential supervisors. The Financial Stability Institute produced a detailed report recently issued by the Bank of International Settlements on the variations and importance of strong liquidity stress tests. The report acknowledges the continued evolution of liquidity challenges given changes to the overall sector, technology and consumer behavior.  

Liquidity stress tests, which allow financial institutions to review how their liquidity position changes under adverse conditions, can take many forms. The paper reviews a range of approaches used by authorities across the globe. The paper was produced from interviews with banking authorities in Australia, England, Brazil, Singapore, and Europe and covers both bank-level liquidity stress tests and sector-wide stress tests. It includes a comparison of different approaches to stress tests in the different countries as well as specific examples.

Monitoring liquidity levels continues to be a critical challenge for individual financial institutions and relevant supervisors. The reports shares that further developments will be needed in this area to meet ongoing challenges.

Click here to read the full paper.