Measuring Liquidity Mismatch in the Banking Sector

61 Pages Posted: 22 Oct 2013 Last revised: 5 Nov 2017

See all articles by Jennie Bai

Jennie Bai

Georgetown University - McDonough School of Business; National Bureau of Economic Research (NBER)

Arvind Krishnamurthy

Northwestern University - Kellogg School of Management

Charles-Henri Weymuller

Harvard University

Multiple version iconThere are 2 versions of this paper

Date Written: January 8, 2017

Abstract

This paper constructs a Liquidity Mismatch Index (LMI) to gauge the mismatch between the market liquidity of assets and the funding liquidity of liabilities, for 2882 bank holding companies over 2002 to 2014. The aggregate LMI decreases from $4 trillion pre-crisis to -$6 trillion in 2008. We conduct an LMI stress test revealing the fragility of the banking system in early 2007. Moreover, LMI predicts a bank's stock market crash probability and borrowing decisions from the government during the financial crisis. The LMI is therefore informative about both individual bank liquidity and the liquidity risk of the entire banking system.

Keywords: liquidity regulation; market liquidity; funding liquidity; Basel III; liquidity mismatch; macroprudential tool.

JEL Classification: G21, G28

Suggested Citation

Bai, Jennie and Krishnamurthy, Arvind and Weymuller, Charles-Henri, Measuring Liquidity Mismatch in the Banking Sector (January 8, 2017). Journal of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2343043 or http://dx.doi.org/10.2139/ssrn.2343043

Jennie Bai (Contact Author)

Georgetown University - McDonough School of Business ( email )

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HOME PAGE: http://www.jenniebai.com

National Bureau of Economic Research (NBER) ( email )

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Arvind Krishnamurthy

Northwestern University - Kellogg School of Management ( email )

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847-491-2671 (Phone)
847-491-5719 (Fax)

Charles-Henri Weymuller

Harvard University ( email )

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Cambridge, MA 02138
United States

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