The European Central Bank (ECB) has revealed that it will conduct sensitivity analysis of liquidity risk to assess the ability of the eurozone banks to handle idiosyncratic liquidity shocks.

The ECB in its press statement said: “The exercise will focus on banks’ expected short-term cash flows to calculate the ‘survival period’, which is the number of days that a bank can continue to operate using available cash and collateral with no access to funding markets.”

The cash stress test will be conducted by ECB’s regulatory wing Single Supervisory Mechanism (SSM) over the next four months. It will include nearly 100 banks, which the ECB directly supervises.

SSM will simulate extreme hypothetical shocks in the test such as people withdrawing all their deposits, freezing wholesale funding, and a three-notch downgrade to credit rating.

The test will be based on the bank data as of the end of last year and will exclude the impact of ECB’s monetary policy.

Overall, it will focus on the resilience of individual banks rather than the banking system as a whole.

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The cash stress test will help to determine the longevity of the banks with available and collateral funds.

The results of the test are expected to be published on aggregate in the second half of the year.

Subsequently, the evaluation will help to identify weak spots in cash management and may lead to the implementation of additional liquidity requirements.

In November last year, the European Banking Authority (EBA) conducted an EU-wide bank stress test.

The core capital ratios of all 48 banks assessed were found to be above the threshold mark.

The 2018 test was conducted in collaboration with the ECB and the European Systemic Risk Board (ESRB).