February 6, 2019
FRANKFURT (Reuters) – The European Central Bank will tell banks how many days they could last before going bust during a run on their cash, under a new stress test introduced on Wednesday.
Over the next four months, regulators at the ECB’s Single Supervisory Mechanism (SSM) will simulate “adverse and extreme hypothetical shocks in which banks face increasing liquidity outflows” to determine each bank’s “survival period”.
“The exercise will focus on banks’ expected short-term cash flows to calculate the ‘survival period’, which is the number of days that a bank can continue to operate using available cash and collateral with no access to funding markets,” the ECB said.
The results of the test won’t feed directly into how much capital and cash each bank must hold, but they will be used to identify weak points.
“The results will inform the supervisor about the relative vulnerability of banks to different liquidity shocks applied in the exercise and will also identify improvements needed in banks’ liquidity risk management,” the ECB said.
(Reporting By Francesco Canepa, editing by Larry King)