European Systemic Risk Board publishes monitoring framework and composite indicators for systemic liquidity risks

The European Systemic Risk Board has published a report setting out a monitoring framework for systemic liquidity risks across the financial system, built around two dimensions of liquidity and three proposed composite indicators intended to capture underlying vulnerabilities that could lead to elevated liquidity stress. The framework distinguishes between funding liquidity, the ability of financial institutions to obtain funding, and market liquidity, the ability of market participants to trade financial assets quickly and in size without significant price changes. It also incorporates a measure of contagion and amplification risk, reflecting how localised liquidity shortages can propagate across entities and markets and intensify through adverse feedback loops. The proposed composite indicators separately track funding liquidity risks, market liquidity risks, and contagion and amplification risks, and the framework expands existing approaches by extending coverage beyond banks and sovereign bond markets to include non-bank financial intermediaries and additional key markets.