Conference Paper
Assessing Liquidity at Risk in Turkish Banks: A Copula-Driven Monte Carlo Stress Test
No.
ERF32AC_184
Publisher
ERF
Date
May, 2026
This study presents a two-stage liquidity stress testing framework for the Turkish banking sector. In the first stage, independent Monte Carlo simulations are used for each bank to calculate Liquidity Coverage Ratio (LCR) distributions under different stress scenarios (Base, Adverse, Severe Adverse). In the second stage, the t-copula method is used to account for interbank correlations and tail dependence; thus, the potential for a bank's liquidity squeeze to spread system-wide is evaluated holistically. The analysis covers 27 banks representing 86% of the sector's total assets as of December 2024, of which 8 are in the domestically systemically important banks (DSIB) group. Banks are divided into two groups based on balance sheet structures, market shares, and potential contagion effects, and differentiated shock parameters are applied to each group. First-round results show that as scenario severity increases, LCR values tend to decrease and failure rates tend to rise. Under the Severe Adverse scenario, the sector-wide failure rate ranges from 72–77% for Total LCR and 31–45% for FX LCR. The DSIB group shows higher vulnerability in Total LCR under the Severe Adverse scenario (99% failure rate), while the Other Banks group carries higher risk in FX LCR. In the second-round analysis, with tail dependence included, systemic risk appears higher. Second-round failure rates for FX LCR are higher than first-round results, indicating stronger interbank dependence in FX liquidity. Joint breach analysis shows that, on average, 19,5–20,8 banks can simultaneously fall below the LCR threshold under the Severe Adverse scenario. When fragility rankings and correlation analysis are evaluated together, banks with both high individual vulnerability and high systemic linkages are identified. These findings support policy recommendations such as risk-based supervision and monitoring, increased HQLA buffers, strengthened FX liquidity management plans, and accounting for tail dependence in stress tests. The study contributes to the liquidity risk management and stress testing literature and provides a framework that can be applied periodically or ad-hoc by supervisory authorities and banks.
Authors
Serdar Özgür
Banking Supervisor, Banking Regulation and Supervision Agency...