Liquidity Gap Report for Stress Testing Structural Liquidity Risk

The need to focus on banks funding structure and stress testing in an explicit way arose as a consequence of the crisis of past decades. Liquidity risks usually occur as a consequence of other kinds of risks, hence analysing scenarios in a prospective manner is essential for the assessment if the bank can fulfill its obligations as they come due and if its funding costs are appropriate. The structural liquidity risk and the degree of the liquidity mismatch can be measured based on the liquidity gap analysis, where expected cash-in- and outflows, divided in different time-buckets are depicted. The liquidity gap report (LGR) shows if a liquidity shortcoming appears in the future and how high is the amount a bank would have to pay, if any hedging were not possible. This paper shows how to build a comprehensive LGR which is the base for both, liquidity and wealth risk evaluation. To improve the accuracy of the forecast, the counterbalancing capacity will be incorporated into the LGR. This tool is a methodological basis for quantitative and qualitative risk assessment and stress testing.