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A New Liquidity Risk Measure for the Chilean Banking Sector

This paper introduces a new metric for central banks – and in particular for the Central Bank of Chile – to measure liquidity risk in their banking sector using the bidding behavior of commercial banks in their open market operations.

By: , and Date: June 7, 2017 Topic: Finance & Financial Regulation

This paper was published in Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 19(3), pages 26-67, December, 2016 

The objective of this work is to construct an appropriate measure of liquidity risk for Chilean banks. There are already several measures of liquidity risk in the literature, but most of these metrics are based on specific assumptions and expert opinion. In order to overcome potential problems associated with discretionary assumptions, and to exploit information available at the Central Bank of Chile, we propose a metric based on the behavior of banks in the Central Bank’s open market operations.

We calculate the liquidity indicator at an aggregate level and for a sample of banks in a period that includes the recent subprime crisis. After that, we compare our indicator with a variety of standard metrics proposed in the literature. We find that our metric reasonably captures episodes of liquidity crises and therefore can be used as a complementary tool in the assessment of systemic risks.

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Policy Contribution

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The resolution of non-performing loans (NPLs), a stock of roughly €870 billion in the EU banking industry, is central to the recovery of Europe’s banking sector and the restructuring of the excess debt owed by private sector borrowers. Could the development of distressed debt markets be a new element of capital market deepening in Europe?

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External Publication

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The monitoring and analysis of capital movements is essential for policymakers, given that capital flows can have welfare implications. This report, commissioned by the European Commission’s Directorate-General for Financial Stability, Financial Services and Capital Markets Union, aims to analyse capital movements in the European Union in a global context.

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Opinion

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Policy Contribution

European Parliament

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Policy Contribution

A European perspective on overindebtedness

The sequence of crisis and policy responses after mid-2007 was a gradual recognition of the unsustainability of the euro-area policy framework. The bank-sovereign vicious circle was first observed in 2009 and became widely acknowledged in the course of 2011 and early 2012. The most impactful initiative has been the initiation of a banking union in mid-2012, but this remains incomplete and needs strengthening.

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