Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/248453 
Year of Publication: 
2021
Series/Report no.: 
BoF Economics Review No. 9/2021
Publisher: 
Bank of Finland, Helsinki
Abstract: 
This paper extends traditional payment system simulation analysis to counterparty liquidity risk exposures. The used stress test scenario corresponds to the counterparty stress scenario applied in the BCBS standard "Monitoring tools for intraday liquidity management" (BIS, 2013). This stress scenario is simulated for participants of the Finnish TARGET2 component with the new BoF-PSS3 simulator. Two liquidity deterioration indicators are introduced to quantify counterparty liquidity risk exposures. As comparison of liquidity risk projections to the available liquidity of participants in the system only yields a restricted and system-specific view of the severity of the scenarios, we compare the liquidity risks to high-quality liquid assets (HQLA) available at the group level to assess the overall liquidity risk that participants face in TARGET2. Our results generally comport with the literature and results reported elsewhere. Banking groups are exposed to a liquidity deterioration equivalent from 20 % to 60 % of their respective HQLA in just 0.35 % of the daily scenario observations. The exercise paper demonstrates that our proposed alternative form of payment system analysis can be helpful in banking supervision, micro- and macroprudential analysis, as well as resolution authorities' assessment of the effects of their actions on payment systems.
Subjects: 
payment systems
stress testing
liquidity risks
counterparty risks
systemic risk
computer simulation
Persistent Identifier of the first edition: 
Document Type: 
Research Report

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