The Spillover Effect of Liquidity Transparency on Liquidity Holdings

82 Pages Posted: 8 Jun 2021 Last revised: 31 Oct 2022

See all articles by Yao Lu

Yao Lu

Cornell University - Samuel Curtis Johnson Graduate School of Management

Date Written: June 8, 2021

Abstract

I study how transparency of bank liquidity affects peer banks' liquidity holdings. Specifically, I exploit the disclosure of the liquidity coverage ratio mandated for a group of large US banks. I predict and find that the disclosure reduces non-disclosing banks’ liquidity holding incentives. This happens because the disclosure mitigates banks' uncertainty about aggregate liquidity risk. Using bank business interactions to measure how much a bank learns from the disclosure, I find that non-disclosing banks that learn more cut their liquidity significantly more in response to the disclosure. In the aggregate, liquidity in the banking system declined, and systemic risk increased after the disclosure rule adoption.

Keywords: Liquidity transparency, liquidity coverage ratio disclosure, spillover effect

JEL Classification: E44, G21, G28, M41

Suggested Citation

Lu, Yao, The Spillover Effect of Liquidity Transparency on Liquidity Holdings (June 8, 2021). Available at SSRN: https://ssrn.com/abstract=3861204 or http://dx.doi.org/10.2139/ssrn.3861204

Yao Lu (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
172
Abstract Views
648
Rank
261,541
PlumX Metrics