Stress Tests and Liquidity Requirements
Higher capital requirements are only part of the reform of banking systems in response to the financial crisis. Basel III also provides for higher liquidity standards. The liquidity coverage ratio requires that high-quality liquid assets must equal or exceed expected net cash outflows over a 30-day period under a stress scenario (BCBS 2013).
The net stable funding ratio requires that over a longer period of one year, the available amount of stable funding equal or exceed the required amount of stable funding (BCBS 2014b).18For their part, stress tests simulating the impact on banks from severe downturns in the economy have become a salient supervisory instrument (see Goldstein 2017 for an extensive assessment). They played a key role in restoring confidence in US banks in 2009. Stress test results have determined whether banks are allowed to increase dividends and carry out buybacks, providing a strong incentive to meet capital levels and operational practices likely to pass the tests.[18]