New liquidity metric indicates higher liquidity risks

Read the entire Economic Commentary: Could the banks cope with large deposit outflows? Assessment according to a new liquidity metric

There are two international liquidity metrics that impose requirements on a bank's liquidity risk, Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR). LCR is a metric showing a bank’s liquid assets in relation to its net cash outflow over 30 days. NSFR is a measure of how much stable funding a bank has in relation to its illiquid assets with maturities of more than a year. Since both metrics focus on a certain time period, 30 days and 1 years respectively, there is a risk that high liquidity risks will arise in another time period. As a complement, the liquidity risk should therefore also be measured by studying how assets and liabilities fall due for all time periods in the future.

In view of this, the Riksbank has developed the new liquidity metric, DLC. This metric calculates when a bank's worst liquidity situation according to contracted maturities occurs. The metric also calculates how large a bank run a bank can cope with at this time. The authors' analysis shows that banks tend to optimise their liquidity situation at the times on which the international liquidity metrics LCR and NSFR focus. At other times, the banks exhibit higher liquidity risks. It is therefore important that authorities and the banks themselves monitor the liquidity risk the banks take according to a metric such as DLC.

Authors: Ida Hansson and Tobias Lindqvist, work in the Financial Stability Department of the Riksbank.