The Spillover Effect of Liquidity Transparency on Liquidity Holdings
87 Pages Posted: 8 Jun 2021 Last revised: 29 Feb 2024
Date Written: June 8, 2021
Abstract
I study how transparency of bank liquidity affects peer banks’ liquidity holdings. Specifically, I exploit the disclosure of the liquidity coverage ratio mandated for a group of large US banks. I predict and find that the disclosure reduces non-disclosing banks’ liquidity holding incentives. This happens because the disclosure mitigates banks’ uncertainty about aggregate liquidity risk. Using bank business interactions to measure the treatment intensity of the disclosure, I find that more treated non-disclosing banks cut their liquidity significantly more in response to the disclosure. In addition, the disclosure rule was followed by lower overall liquidity and a build-up of systemic risk, indicating an economically considerable disclosure spillover effect in the aggregate. My paper contributes to the literature by revealing a new economic force, the spillover effect of mandated liquidity disclosure, that shapes banks’ liquidity holdings.
Keywords: Liquidity transparency, liquidity coverage ratio disclosure, spillover effect
JEL Classification: E44, G21, G28, M41
Suggested Citation: Suggested Citation