The information content of Basel III liquidity risk measures

We present a comprehensive analysis to calculate the Basel III liquidity coverage ratio (LCR) and the net stable funding ratio (NSFR) of U.S. commercial banks using Call Report data over the period 2001-2011, and provide indirect empirical evidence on net cash outflow rates of certain liability categories. In addition, we examine potential links between Basel III liquidity risk measures and bank failures using a model that differentiates between idiosyncratic and systemic liquidity risks. We find that while both the NSFR and the LCR have limited effects on bank failures, the systemic liquidity risk is a major contributor to bank failures in 2009 and 2010. This finding suggests that an effective framework of liquidity risk management needs to target liquidity risk at both the individual level and the system level.