The European Central Bank (ECB) said Wednesday it would check up on dozens of banks’ ability to withstand a crisis from a new angle, looking this time into how long their cash piles would hold out.
The ECB’s banking supervision arm will calculate a so-called ‘survival period’, defined as ‘the number of days that a bank can continue to operate using available cash and collateral with no access to funding markets’.
Around 100 banks will pass under the supervisors’ microscope.
Ten years after the collapse of Lehman Brothers, the latest ‘stress test’ differs from past rounds as it is not based on a wider simulated scenario like a global economic or political crisis.
Instead, each bank will be put through a battery of ‘adverse and extreme hypothetical shocks’ at different levels of intensity, causing ‘increasing liquidity (cash) outflows’.
The ECB ‘will not assess the potential causes of these shocks or the impact of wider market turbulence,’ it said.
Nor will it build into the simulation a potential policy response – like emergency loans – from the central bank.
The tests are especially unusual as they do not examine how economic headwinds would impact a bank’s capital ratio, or the relationship between its capital and its assets – a measure supervisors have focused on lifting since the 2008 financial crisis.
But the spotlight on liquidity is especially timely as it harks back to Lehman’s demise for lack of cash.
Since then, banks have been required to keep enough liquidity on hand to cover short-term financing needs.
The stress test is to begin immediately and last for four months.