Application Of Commercial Banks’ Liquidity Risk Stress Test

Conversing short-term debt into long-term loan is the traditional banks’major source of profit. It also determines their high-risk nature. After the financial crisis in the United States, the international focus is on monitoring the banks’ liquidity risk. Meanwhile, stress test is widely supported and adopted because it satisfies liquidity risk’s character of low probability and strong destruction. In recent years, domestic banking is increasing openness as well as uncertainty. In this case, we can not preclude the possibility of liquidity shortage. The usage of stress test which is the representative of risk control measures can prevent the negative impact of potential events. That is essential for ensuring the stability of China’s financial system.This paper summarizes the application status of China’s banking stress tests. The representation of banks’ liquidity risk stress test practices are introduced as well. During explaining liquidity risk stress test steps, it specifically discusses what kind of analytic method can be picked up at each step. We finally construct a risk stress test framework which is consistent with logic and also cultivates banks.In the empirical part, it selects big four banks as the big four bank sample group and selects all the listed joint-equity banks except Ping An Bank as the joint-equity sample group. Through the theory analysis of the causes of liquidity risk, it picks up eleven indexes as the original risk variables, including non-performing loan rate and so on. Then the stress test model based on factor analysis method is constructed. Common factors are extracted. Two groups’ liquidity comprehensive score evaluations are obtained. It combines historical scenario with hypothesis scenario and sets three pressure levels. According to the performance of the United States of America under the financial crisis and the regulations of China’s Banking Regulatory Commission, it quantifies the impact caused by liquidity shortage after simulating the future performance of those eleven liquidity risk factors. Liquidity scores at different pressure levels are obtained at last.Observing four common factors’weights and their behaviors under different pressure levels may lead to analysis of liquidity affecting reasons in depth. We can also evaluate the two samples’ risk tolerance by comparing the moves of normalized total scores. The main conclusions of this paper are listed as the followings. Firstly, changes in economic conditions affect the joint-stock banks’liquidity mostly. Meanwhile, changes in policy variables affect the big fours’liquidity mostly. Secondly, China’s banking system has abundant liquidity by the end of2012. Thirdly, systemically important banks’liquidity risk is more sever under stress scenario. Fourthly, joint-equity banks suffer more serious liquidity shocks than the big fours when macro economy turns down. Lastly, banks’ factors have the least important impact on their liquidity conditions. Supervisors still need to pay attention to their hidden uncertainty. As a result, a stress test model involves multiple indexes is constructed and we can also conduct comparative analysis on the liquidity risk factors and risk-resisting ability of different sized banks.In addition, the article also discusses the problems existing in China’s commercial bank adopting liquidity risk stress test. Some suggestions both for banks and for regulator to strengthen banks’liquidity risk management and improve stress test’s application are also put forward. Finally, based on summing up the deficiencies, it proposes the future research direction.