Liquidity risk sensitivity of czech commercial banks

Abstract

The recent fi nancial crisis has shown that a liquidity risk plays an important role in the current developed fi nancial system. One of the effi cient tools of liquidity risk management is stress testing which can show banks their potential vulnerability to liquidity shocks. The aim of this paper is therefore to measure the liquidity risk sensitivity of Czech commercial banks and to fi nd out the most severe scenario and the most vulnerable bank. Our sample included signifi cant part of the Czech banking sector; we used unconsolidated balance sheet data over the period from 2000 to 2011 which were obtained from annual reports of Czech banks. We have evaluated liquidity risk of each bank in the sample via six diff erent liquidity ratios. Then we stressed these baseline values in three stress scenarios: run on a bank (simulated by a 20% withdrawal of deposits), confi dence crisis on the interbank market (simulated by a withdrawal of 20% of interbank deposits) and use of committed loans by counterparties (simulated by a 5% increase of loans provided to nonbank clients). We measured the impact of all scenarios by relative change of liquidity ratios. The impact of modelled liquidity shocks diff ers among scenarios. The most serious liquidity problems would be caused by the fi rst scenario-run on a bank. The negative infl uence of third scenario (use of committed loans) is less severe. The confi dence crisis on the interbank market would not aff ect bank liquidity at all. The results also show that the severity of the impact of all scenarios worsens in periods of fi nancial distress. We have also found that large and medium sized banks are most vulnerable to liquidity shocks, mainly to massive deposit withdrawals.