Liquidity Risk, Market Valuation, and Bank Failures

53 Pages Posted: 19 Nov 2012

See all articles by Deming Wu

Deming Wu

Government of the United States of America - Office of the Comptroller of the Currency (OCC)

Han Hong

Stanford University

Date Written: November 18, 2012

Abstract

We propose a model that links the conditional probability of bank failure to insolvency and liquidity risks, and show that liquidity risk affects bank failures through systematic and idiosyncratic channels. Empirical results based on U.S. bank data between 1985 and 2011 show that this model outperforms typical accounting-ratio-based models. We find that systematic liquidity risk was a major predictor of bank failures in 2008 and 2009. This finding has important implications for the new international standards on liquidity risk management.

Keywords: Bank failure, liquidity risk, insolvency risk, market valuation

JEL Classification: G21, G28, G01, C53

Suggested Citation

Wu, Deming and Hong, Han, Liquidity Risk, Market Valuation, and Bank Failures (November 18, 2012). Available at SSRN: https://ssrn.com/abstract=2177583 or http://dx.doi.org/10.2139/ssrn.2177583

Deming Wu (Contact Author)

Government of the United States of America - Office of the Comptroller of the Currency (OCC) ( email )

400 7th Street SW
Washington, DC 20219
United States

Han Hong

Stanford University ( email )

Landau Economics Building
579 Serra Mall
Stanford, CA 94305-6072
United States

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