ESRB reports on monitoring framework for systemic liquidity risks in financial system

Article summary

The European Systemic Risk Board (ESRB) has published a report detailing a monitoring framework for systemic liquidity risks within the financial system. This framework addresses two primary dimensions of liquidity: funding liquidity, which pertains to the ability of financial institutions to secure funding, and market liquidity, which relates to the capacity of market participants to trade financial assets swiftly and in substantial volumes without causing significant price fluctuations. Additionally, the framework assesses the risks of contagion and amplification, recognising that localised liquidity shortages can escalate into widespread stress across various entities and markets, potentially intensifying through adverse feedback loops. The report introduces three composite indicators designed to identify underlying vulnerabilities that may lead to heightened liquidity stress: one for funding liquidity risks, another for market liquidity risks, and a third for contagion and amplification risks.