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what is the purpose of liquidity stress testing? What is its role and useful for? (using...

what is the purpose of liquidity stress testing? What is its role and useful for? (using own words, thanks)

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Answer #1

Liquidity stress testing assesses the ability of a financial institution to meet its obligations during periods of stress. It measures the liquidity profile of the balance sheet of The Financial Institutions at an enterprise level. The purpose of liquidity stress testing is to ascertain if if a particular institution has enough resources to be able to meet unexpected market disruptions. This includes analysis of multiple scenarios and performance of the test under different time Horizons. The results are used to determine the liquidity buffer and prepare a suitable contingency funding plan.

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