Journal of Law, Finance, and Accounting > Vol 7 > Issue 2

Liquidity Risk at Large U.S. Banks

Laurence Ball, Department of Economics, Johns Hopkins University, USA, lball@jhu.edu
 
Suggested Citation
Laurence Ball (2023), "Liquidity Risk at Large U.S. Banks", Journal of Law, Finance, and Accounting: Vol. 7: No. 2, pp 229-272. http://dx.doi.org/10.1561/108.00000064

Publication Date: 17 May 2023
© 2023 L. Ball
 
Subjects
Disclosure,  Financial Reporting
 
Keywords
JEL Codes: G21, G24, G28
Liquidity riskliquidity regulationliquidity coverage ratio
 

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In this article:
Introduction 
Major Types of Liquidity Risk 
Developing a Liquidity Stress Test 
Losses of Retail Deposits 
Losses of Secured Funding 
Derivatives Valuation Changes 
Inflows in the LCR Calculation 
Bounds for Eligible HQLA 
Revised LCRS for the Six Large Banks 
Discussion 
Conclusion 
References 

Abstract

This paper studies liquidity risk at the six largest U.S. banks. The starting point is the stress tests performed under the Liquidity Coverage Ratio (LCR) regulation, which compare a bank’s liquid assets to its loss of cash in a stress scenario that regulators say is based on the 2008 financial crisis. These tests find that all of the large banks could endure a liquidity crisis for 30 days without running out of cash. This paper argues, however, that some of the assumptions in the LCR stress scenario are not pessimistic enough to capture what could happen in a crisis like 2008. The paper then proposes changes in the dubious assumptions and performs revised stress tests. For 2019 Q4, the revised tests suggest that all of the banks are at risk of running out of cash in less than 30 days. This negative finding is most clear-cut for Goldman Sachs and Morgan Stanley.

DOI:10.1561/108.00000064