Abstract
Basel III liquidity regulation introduced two new metrics with a focus on time horizons up to 30 days (LCR: Liquidity Coverage Ratio) and beyond one year (NSFR: Net Stable Funding Ratio) respectively. This paper bridges the horizon gap by applying a yearlong liquidity stress test to the implied cash flow data of the seven biggest Turkish banks to gauge the extent (from 1 to 365 days) to which they can withstand a country-specific liquidity crisis. At the same time, this is the first study that has revealed the survival horizons of banks after a liquidity stress test at the institutional level. Results show that all banks fail each of the eight Turkey-specific liquidity stress scenarios (with a single exception) even under various Central Bank of the Republic of Turkey (CBRT) supports while complying with both LCR and NSFR ex-ante. As such, regulators would be better off employing the framework as a complementary local tool to the global Basel III liquidity regulation in order to account for medium-term liquidity risks between 30 days and one year. And therewithal, central banks could also use the results to draw up a contingency funding plan by reconsidering their hypothetical reactions to a liquidity crisis.
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