On 7 October 2019, the European Central Bank (ECB) published the final results from its Sensitivity Analysis of Liquidity Risk – Stress Test 2019. The shocks simulated in the exercises were calibrated on the basis of experience gained in recent crisis episodes. For further information on the details of the stress test, see our previous blog here.
The ECB found that the vast majority of banks that it directly supervised have overall comfortable liquidity positions despite some vulnerabilities being identified, which require further attention. The ECB states that the results of the exercise were broadly positive observing that around half of the 103 participant banks reported a “survival period” of more than six months under an adverse shock, and more than four months under an extreme shock.
Based on its findings, the ECB will require banks to follow up in the following areas:
- survival periods calculated on the basis of cash flows in foreign currencies are often shorter than those reported at the consolidated level;
- when considered on a stand-alone basis, subsidiaries of euro area banks domiciled outside the euro area typically display shorter survival periods than those within;
- collateral management practices would benefit from further improvement in some banks; and
- banks underestimate the negative impact on liquidity that could result from a credit rating downgrade.