Do stress tests affect bank liquidity creation?

Nguyen, Thach Vu Hong; Ahmed, Shamim; Chevapatrakul, Thanaset; Onali, Enrico

doi:10.1016/j.jcorpfin.2020.101622

Cited by 25 publications

(10 citation statements)

References 107 publications

(136 reference statements)

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“…Since cash and available-for-sale securities are the most liquid assets on a bank's balance sheet, it is fairly normal for them to be volatile and to drive most of the Marginal Expected Shortfall. More recently, Bakoush et al (2019) or Nguyen et al (2020) also stress the importance of highly liquid instruments in avoiding systemic liquidity risk.…”

Section: Discussionmentioning

confidence: 99%

Modeling the Connection between Bank Systemic Risk and Balance-Sheet Liquidity Proxies through Random Forest Regressions

Zeldea

2020

Administrative Sciences

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Balance-sheet indicators may reflect, to a great extent, bank fragility. This inherent relationship is the object of theoretical models testing for balance-sheet vulnerabilities. In this sense, we aim to analyze whether systemic risk for a sample of US banks can be explained by a series of balance-sheet variables, considered as proxies for bank liquidity for the 2004:1–2019:1 period. We first compute Marginal Expected Shortfall values for the entities in our sample and then imbed them into a Random Forest regression setup. Although we discover that feature importance is rather bank-specific, we notice that cash and available-for-sale securities are the most relevant factors in explaining the dynamics of systemic risk. Our findings emphasize the need for heightened prudential regulation of bank liquidity, particularly in what concerns cash and immediate liquidity instrument weights. Moreover, systemic risk could be consistently tamed by consolidating bank emergency liquidity provision schemes.

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Section: Discussionmentioning

confidence: 99%

Modeling the Connection between Bank Systemic Risk and Balance-Sheet Liquidity Proxies through Random Forest Regressions

Zeldea

2020

Administrative Sciences

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“…Several researchers who have tested countercyclical policies on finance were carried out by [15][16][17][18][19][20][21][22][23][24][25][26]. Furthermore, [17][18][19][20][21][22][23] show that countercyclical policies can mitigate and reduce bank liquidity risk.…”

Section: Literatur Reviewmentioning

confidence: 99%

Bank Performance Based on Core Capital Amid the COVID-19 Pandemic in Indonesia

Susilowati

Purnama

2022

KSS

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COVID-19 has had an impact on banking, liquidity and credit. The Financial Services Authority (OJK) has tried to mitigate some of these effects with countercyclical policies as stated in OJK regulation number 11/POJK.03/2020. It is however unclear whether the policy can reduce banking risk in the midst of easing or relaxation policies. This research employed secondary data taken from the Indonesian banking statistics published by OJK. Indicators of bank performance used in the study referred to the policies of the OJK and comprised: capital adequacy ratio, core capital ratio to riskweighted asset, return on assets ratio, operational efficiency ratio, net interest margin ratio, loans to deposits ratio, and liquid assets ratio. The performance index analysis was divided into two periods: January 2017- February 2020 and March 2020 - February 2021. The period was divided to determine the quality of bank performance before and after the stipulation of restructuring policy. The index calculation was carried out by determining the weight based on the dimensions (bank performance indicators). The weight given to each of these indicators was conformed to all indicators. The analysis of the bank performance used the composite index of development calculation. Based on the results, the availability of bank capital affected financial performance. The implementation of countercyclical policies had an impact on bank performance in banks that had greater availability of capital. Banks can evaluate and improve strategies in countercyclical implementation to support national economic recovery. Keywords: core capital, CAR, CCR to RWA, ROA, OER, NIMR, LDR

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“…Their result indicates a negative impact of a stress test on the economy, increasing with the size of the banks. Nguyen et al (2020) examine how the stress tests affect the US bank liquidity creation by considering the stress tests conducted during the period from 2009 to 2016. Their results demonstrate the negative impact of stress tests for both on-and-off-balance sheet and asset-side liquidity creation.…”

Section: Literature Reviewmentioning

confidence: 99%

Bank stockholders’ vs bank bondholders’ market discipline during crisis time: an investigation based on supervisory stress test information disclosure

Dala

2021

JFEP

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Purpose This paper aims to investigate how stockholders and bondholders react to the information disclosed on the financial markets during crisis periods. This paper considers the 2011 European Banking Authority’s stress test as it disclosed detailed information about banks. Design/methodology/approach It was conducted during the European sovereign debt crisis, and this paper uses an event study methodology. This paper analyzes the average cumulative abnormal returns for different subsamples of banks. This paper compares the reactions of stockholders and bondholders to the stress test by considering pre-results announcements (signal generating process) to the publication of the results on the disclosure date, using quantitative data for each individual bank that participated in the stress test (the signal provided to the financial market). Findings This paper finds that stockholders’ reaction is more sensitive to idiosyncratic components of the disclosed information, whereas bondholders are more influenced by systematic risk. A deeper investigation shows that subordinated bondholders tend to behave quite similarly to stockholders. This specific reaction of stockholders during financial distress may make them more likely than bondholders to impose market discipline during troubled periods. Originality/value This paper brings several new insights to the behavior of stock and bond holders during times of financial distress and makes recommendations to regulators that may serve to refine communication to markets to reduce the shock of negative news.

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Do stress tests affect bank liquidity creation?

Cited by 25 publications

References 107 publications

Modeling the Connection between Bank Systemic Risk and Balance-Sheet Liquidity Proxies through Random Forest Regressions

Modeling the Connection between Bank Systemic Risk and Balance-Sheet Liquidity Proxies through Random Forest Regressions

Bank Performance Based on Core Capital Amid the COVID-19 Pandemic in Indonesia

Bank stockholders’ vs bank bondholders’ market discipline during crisis time: an investigation based on supervisory stress test information disclosure

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