Liquidity risk and ECB stress tests

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As the ECB stress tests promote a good chunk of our hard battered banks, executives still fret about the regulatory liquidity requirements coming into effects in the following months. Two requirements, aimed at insuring banks have proper inventories of liquidity to overcome a stressful and protracted strained environment, are keeping risk managers busy with numbers of alchemic complexity: the liquidity coverage ratio and the net stable funding ratio.

Though banks are required obsessively to carry an umbrella no-matter-what the weather may look like, regulators might not have properly assessed the likely impact of such requirements on banking operations – i.e. the incentive on asset selection once they have to load their balance sheets with high quality and liquid assets. With the regulators trying to anticipate the next crisis without concentrating on resolving the current one I want to share an excellent interview found here by Yanis Varoufakis, a professor at the University of Texas in Austin, that points out the weak points in the stress tests results just published by the European Central Bank.

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