Measuring Liquidity Mismatch in the Banking Sector

61 Pages Posted: 22 Oct 2013 Last revised: 5 Nov 2017

Multiple version iconThere are 2 versions of this paper

Date Written: January 8, 2017


This paper constructs a Liquidity Mismatch Index (LMI) to gauge the mismatch between the market liquidity of assets and the funding liquidity of liabilities, for 2882 bank holding companies over 2002 to 2014. The aggregate LMI decreases from $4 trillion pre-crisis to -$6 trillion in 2008. We conduct an LMI stress test revealing the fragility of the banking system in early 2007. Moreover, LMI predicts a bank's stock market crash probability and borrowing decisions from the government during the financial crisis. The LMI is therefore informative about both individual bank liquidity and the liquidity risk of the entire banking system.

Keywords: liquidity regulation; market liquidity; funding liquidity; Basel III; liquidity mismatch; macroprudential tool.

JEL Classification: G21, G28

Suggested Citation

Bai, Jennie and Krishnamurthy, Arvind and Weymuller, Charles-Henri, Measuring Liquidity Mismatch in the Banking Sector (January 8, 2017). Journal of Finance, Forthcoming. Available at SSRN: or

Jennie Bai (Contact Author)

Georgetown University - Department of Finance ( email )

3700 O Street, NW
Washington, DC 20057
United States


Arvind Krishnamurthy

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States
847-491-2671 (Phone)
847-491-5719 (Fax)

Charles-Henri Weymuller

Harvard University ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States

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