Lingfeng Lyu, Michael Sherris, Francesco Ungolo, Zhiqian Ye

While the structural mismatch between illiquid assets and demandable liabilities is a source of fragility in traditional banking, this capital–liquidity tradeoff is migrating to the non-banking sector, emerging as a vulnerability in the global aged care industry. Unlike traditional banks, aged care providers are highly exposed to demographic and mortality shocks. A crisis such as the COVID-19 pandemic can reduce occupancy, depressing operating cash flows and triggering large-scale refunds of deposit-like accommodation balances. Using Australia’s newly introduced Minimum Liquidity Amount (MLA) regulation as a prime empirical setting, this paper evaluates rigid, one-size-fits-all liquidity buffers against forward-looking, stress-based frameworks. We develop a stochastic simulation model that integrates resident flows with macroeconomic conditions and provider balance-sheet dynamics, utilising a continuous-time Markov chain. The analysis of representative providers reveals that the uniform application of the default MLA misaligns with true liquidity risk profiles: it imposes excessive regulatory constraints on larger providers while remaining insufficiently stringent for smaller ones. To address these limitations, a risk-sensitive MLA framework is proposed, calibrated via a multidimensional stress testing procedure which replicates the regime shifts induced by exogenous shocks. Expressed as a linear, balance-sheet-based rule, the risk-sensitive framework preserves crisis resilience while expanding the capital–liquidity frontier across the aged care sector. By integrating stress-test-based foundations within a transparent rule, it offers a transferable template for prudential regulation beyond the banking perimeter.