The information content of Basel III liquidity risk measures

Han Hong; Jing Zhi Huang; Deming Wu

doi:10.1016/j.jfs.2014.09.003

The information content of Basel III liquidity risk measures

Han Hong, Jing Zhi Huang, Deming Wu

Finance

Research output: Contribution to journal › Article › peer-review

106 Scopus citations

Abstract

We present a comprehensive analysis to calculate the Basel III liquidity coverage ratio (LCR) and the net stable funding ratio (NSFR) of U.S. commercial banks using Call Report data over the period 2001-2011, and provide indirect empirical evidence on net cash outflow rates of certain liability categories. In addition, we examine potential links between Basel III liquidity risk measures and bank failures using a model that differentiates between idiosyncratic and systemic liquidity risks. We find that while both the NSFR and the LCR have limited effects on bank failures, the systemic liquidity risk is a major contributor to bank failures in 2009 and 2010. This finding suggests that an effective framework of liquidity risk management needs to target liquidity risk at both the individual level and the system level.

Original language	English (US)
Pages (from-to)	91-111
Number of pages	21
Journal	Journal of Financial Stability
Volume	15
DOIs	https://doi.org/10.1016/j.jfs.2014.09.003
State	Published - Dec 1 2014

All Science Journal Classification (ASJC) codes

General Economics, Econometrics and Finance
Finance

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10.1016/j.jfs.2014.09.003

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title = "The information content of Basel III liquidity risk measures",

abstract = "We present a comprehensive analysis to calculate the Basel III liquidity coverage ratio (LCR) and the net stable funding ratio (NSFR) of U.S. commercial banks using Call Report data over the period 2001-2011, and provide indirect empirical evidence on net cash outflow rates of certain liability categories. In addition, we examine potential links between Basel III liquidity risk measures and bank failures using a model that differentiates between idiosyncratic and systemic liquidity risks. We find that while both the NSFR and the LCR have limited effects on bank failures, the systemic liquidity risk is a major contributor to bank failures in 2009 and 2010. This finding suggests that an effective framework of liquidity risk management needs to target liquidity risk at both the individual level and the system level.",

author = "Han Hong and Huang, {Jing Zhi} and Deming Wu",

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AU - Wu, Deming

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AB - We present a comprehensive analysis to calculate the Basel III liquidity coverage ratio (LCR) and the net stable funding ratio (NSFR) of U.S. commercial banks using Call Report data over the period 2001-2011, and provide indirect empirical evidence on net cash outflow rates of certain liability categories. In addition, we examine potential links between Basel III liquidity risk measures and bank failures using a model that differentiates between idiosyncratic and systemic liquidity risks. We find that while both the NSFR and the LCR have limited effects on bank failures, the systemic liquidity risk is a major contributor to bank failures in 2009 and 2010. This finding suggests that an effective framework of liquidity risk management needs to target liquidity risk at both the individual level and the system level.

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The information content of Basel III liquidity risk measures

Abstract

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