Basel III Liquidity Risk Measures and Bank Failure

L. N. P. Hlatshwayo, M. A. Petersen, J. Mukuddem-Petersen and C. Meniago

Discrete Dynamics in Nature and Society, 2013, vol. 2013, 1-19

Abstract:

Basel III banking regulation emphasizes the use of liquidity coverage and nett stable funding ratios as measures of liquidity risk. In this paper, we approximate these measures by using global liquidity data for 391 hand-selected, LIBOR-based, Basel II compliant banks in 36 countries for the period 2002 to 2012. In particular, we compare the risk sensitivity of the aforementioned Basel III liquidity risk measures to those of traditional measures such as the nonperforming assets ratio, return-on-assets, LIBOR-OISS, Basel II Tier 1 capital ratio, government securities ratio, and brokered deposits ratio. Furthermore, we use a discrete-time hazard model to study bank failure. In this regard, we find that Basel III risk measures have limited ability to predict bank failure when compared with their traditional counterparts. An important result is that a higher liquidity coverage ratio is associated with a higher bank failure rate. We also find that market-wide liquidity risk (proxied by LIBOR-OISS) was the major predictor of bank failures in 2009 and 2010 while idiosyncratic liquidity risk (proxied by other liquidity risk measures) was less. In particular, our contribution is the first to achieve these results on a global scale over a relatively long period for a variety of banks.

Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:hin:jnddns:172648

DOI: 10.1155/2013/172648

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