Banking Law and Liquidity Run Simulation Models in Spain

A liquidity run simulation estimates what happens if depositors and other funders withdraw money quickly. It asks how much cash a bank needs each day, which assets it can turn into cash, and how long it can continue paying obligations as they fall due.

There is no single Spanish law prescribing one “bank run model.” Spanish banks work within Spanish banking law and the EU prudential framework. In particular, Article 86 of the Capital Requirements Directive requires banks to manage liquidity risk and consider bank specific, market wide, and combined stress scenarios. The EU Liquidity Coverage Ratio (LCR) supplies a standard 30-day stress measure. Banks also assess their own liquidity through the Internal Liquidity Adequacy Assessment Process (ILAAP). A model therefore has to inform decisions; producing a compliant ratio alone does not show that a bank could survive every plausible run.

How a bank builds the simulation

First, the bank maps its cash inflows and outflows by day, including maturing debt, expected loan payments, deposit withdrawals and payments it must make even during a crisis. It then tests several shocks:

The model must also distinguish assets on the balance sheet from cash the bank can actually obtain in time. A security may appear liquid in ordinary conditions but take longer to sell, attract a lower price, or already be pledged as collateral. For each scenario, the bank estimates its usable liquidity buffer, its daily funding gap, and its survival period: the time until cumulative cash needs exceed the resources it can use. The ECB’s supervisory approach examines stress testing, survival periods and the credibility of contingency funding plans as part of liquidity assessment.

For example, suppose a bank starts with €10 billion of resources it can use promptly. Its model projects €6 billion of net outflows over 30 days in an ordinary regulatory stress, but €9 billion within five days in a rapid confidence crisis. Both figures matter. The second scenario may force management to act immediately, even if the bank appeared comfortable on a routine 30-day measure.

A useful simulation leads to pre-agreed actions: closer monitoring, securing eligible collateral, obtaining committed funding, reducing avoidable cash outflows and activating the contingency funding plan. Management must test whether those actions remain possible under the same conditions assumed in the scenario. Article 86 connects scenario results to adjustments in liquidity strategy, limits and contingency plans.

Six relevant cases: the Banco Popular litigation

Published judgments directly deciding the validity of a Spanish bank’s liquidity run simulation model are scarce. The six cases below instead concern the 2017 resolution of Banco Popular, a Spanish bank whose acute liquidity problems brought the legal consequences of a rapid run before the EU courts. They are relevant to the point at which a forecast liquidity shortage becomes an assessment that a bank is failing or likely to fail. They do not establish six separate technical rules for model design. The General Court decided these six representative actions together in 2022; later appeals and procedural rulings mean their precise holdings should be read in their procedural context.

The central lesson from Banco Popular is practical and legal. A bank can have assets yet face a critical shortage of cash available at the required moment. A sound Spanish liquidity run simulation should therefore test the speed of withdrawals, the timing and reliability of each funding source, and the point at which management’s planned responses cease to be credible. If the bank is likely to be unable to pay debts as they fall due, the issue moves beyond routine liquidity management into supervisory and potentially resolution decisions.