The Information Value of Basel III Liquidity Risk Measures

Abstract

We calculate the approximate measures of the liquidity coverage ratio and the net stable funding ratio of the Basel III liquidity risk framework using the call report data of U.S. banks. We find that the new measures have little predicting power of bank failures when compared with traditional liquidity risk measures. We also find that marketwide liquidity risk was the major predictor of bank failures in 2009 and 2010. Finally, our study sheds light on the assumptions on net cash outflow rates in the Basel III liquidity risk standards.

Keywords: Basel III, Liquidity risk, Bank failure, Insolvency risk, Information value

JEL Classification: G21, G28, G01, C53