The ultimate stress-test: modelling the next liquidity crisis

What would happen if one of the world’s largest investment banks pulled out of derivatives? Risk managers at Deutsche Bank and JP Morgan Chase are already building this scenario into their stress-tests, and regulators want other banks to do the same.

So far, 2003 has been relatively uneventful – even dull. No Long-Term Capital Management (LTCM), no Asian markets crisis, no Russian bond default. On balance, it’s been the kind of year that has been kind to long-term bond and equity investors. But there’s nothing as inevitable as the next crisis. And the next crisis could be a major derivatives dealer pulling out of the business.

It could be a voluntary exit: an executive committee deciding that the rewards of dealing are not commensurate with