Measuring heterogeneity in bank liquidity risk: Who are the winners and losers?

Jean-Loup Soula ()

The Quarterly Review of Economics and Finance, 2017, vol. 66, issue C, 302-313

Abstract: The 2007–2009 crisis stressed the importance of liquidity for banks. Aggregate liquidity indices provide an account of financial market liquidity conditions. However, these indices do not illustrate how banks individually are affected by such conditions. Similarly, balance sheet indicators only reflect degrees of potential bank exposure to liquidity shocks. Using a risk factor model, we present a way of measuring bank sensitivity to liquidity risk. Our results indicate that liquidity risk is a specific risk, and we shed light on heterogeneities among banks in terms of their exposure to liquidity risk. Liquidity conditions can hinder or benefit banks, and banks can also be insensitive to such conditions. We document large variations in exposure levels across the 2008 and 2011 crises. Larger size and higher capital levels insulate banks from aggregate liquidity risk. However, deposit shares, wholesale funding reliance and funding gaps affect only those banks benefiting from aggregate liquidity risk. These ratios reveal bank liquidity production levels. This suggests that market discipline applies to liquidity production, but only for less risky banks in cases of liquidity crisis. Thus, market discipline appears to be one-sided. This reinforces the necessity of liquidity requirements for all banks as illustrated from the Basel III liquidity ratios.

Keywords: Bank risk management; Liquidity risk; Systemic risk (search for similar items in EconPapers)
JEL-codes: E51 G21 G28 G32 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Working Paper: Measuring heterogeneity in bank liquidity risk: who are the winners and the losers? (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:quaeco:v:66:y:2017:i:c:p:302-313

DOI: 10.1016/j.qref.2017.04.006

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