Introducing a Liquidity Risk Quantitiative Model of Systemic Stability

The Bank of England has adopted a prototype liquidity model – known as RAMSI – which uses data procured from UK bank balance sheets and which may become an industry standard model. Even if not, future liquidity models will almost certainly evolve along these lines. The model encompasses macro-credit risk, interest and non-interest income risk, network interactions and feedback effects. Funding liquidity risk is also introduced by allowing for rating downgrades and incorporating a simple framework in which concerns over solvency, funding profiles and confidence may trigger the outright closure of funding markets to particular institutions. Liability side feedbacks are introduced and how these affect the properties of a quantitative model of systemic risk will be explored.