Abstract
Abstract This paper develops a macroprudential liquidity stress test model for Indonesian banks. Our model incorporates two factors driving liquidity runs: (i) idiosyncratic factors; and (ii) macroeconomic factors. We estimate this model using a sample of 113 banks over the period of January 2011 to June 2018, and dynamic panel data estimators. We establish significant transmission channels from macroeconomic and idiosyncratic (bank idiosyncratic risks) factors to liquidity runs. By using the macroeconomic scenario transmission, we find the liquidity stress test to be more consistent with the solvency stress test.
Highlights
This paper develops a macroprudential liquidity stress test model for Indonesian banks
The liquidity stress test (LST) framework developed in the paper is a part of the overall macroprudential stress test for Indonesian banking system that is initiated in Taruna and Harun (2016a), and continued in Taruna and Harun (2016b), and Taruna and Harun (2017)
The results suggest that macroeconomic conditions (CPI), and the conditioning factor, capital adequacy ratios (CAR), influence changes in run-off/haircut rates in the short term
Summary
This paper develops a macroprudential liquidity stress test (LST) model for Indonesian banks. Prior to the GFC 2008, banks or financial authorities conduct LST by mostly focusing on idiosyncratic risks, and generating liquidity shock scenarios that are based on the historical liquidity shocks in the form of deposit withdrawal This has become the standard liquidity stress test scenario in many central banks or bank supervisors that lead to the design of the liquidity requirement called Liquidity Coverage Ratio (BCBS 2008). The LST framework developed in the paper is a part of the overall macroprudential stress test for Indonesian banking system that is initiated in Taruna and Harun (2016a), and continued in Taruna and Harun (2016b), and Taruna and Harun (2017).4 This LST framework follows the conceptual framework in the previous setup of LST, but increases the consistency of the macro scenario to the solvency stress test by incorporating the impact of the idiosyncratic, macroeconomic variables, and unknown factors to estimate the run-off/haircut for each liquidity instruments..
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