Analysis On Formation Machanism And Supervisory Logic Of Bank Liquidity Risk In Post-crisis Era

Liquidity Risk is the most important risk of commercial banks.With the development of financial sector,the formation machanism of liquidity risk has been changed.In early days,the liquidity risk faced by banks was mainly due to deposit runs,while Liquidity management tools are also mainly deposit-related.With the change of business structure,banks have more funding sources at both ends of assets and liabilities,making the causes of liquidity risk more diversified.Before 2008,out-dated supervisory mode and loose monetary environment accumulated plenty risks,becoming an important reason for the outbreak of the global financial crisis.As a reflection of the crsis,the globally unified rule of LCR and NSFR were introduced in Basel Ⅲ,having a wide and profound influence on banks.However,compared to capital accords,the birth time is short for Basel III liquidity standards,which have not been fully studied and discussed.As a cure to financial crisis,the Basel III liquidity standards focus on the dealing of symptoms,with less attention on the causes and formation mechanism behind,making it difficult to judge the effects of liquidity supervision.Meanwhile,as micro-prudential indicators,LCR and NSFR are quite doubtful to satisfy macro-prudential objectives.Therefore,A core question were brought out by this paper,had the Basel III liquidity standards acurately meet the formation mechanism of liquditiy risk?,which could be broken down into three levels.Firstly,how had the formation mechanism of liquditiy risk changed under different business models and what were the key factors? Secondly,from the perspective of micro prudentiality,were the key risk factors coverd in the Basel III liquidity standards?Were the supervisory boundaries reasonable? Thirdly,from the perspective of macro prudentiality,could the Basel III liquidity standards overcome the influence of financial cycles? Could the soundness of the whole financial system be maintained?Accordingly,the above questions were studied by theoretical and empirical methods.In theory,the method of Bech & Keister(2012)was refered.Starting from the change of banks’ balance sheet,a complete analytical framework was constructed,which studied the formation mechanism under three business models,which were "Traditional Situation","Interbank Debt Expansion" and "Secured Financing and Securitization ".On top of that,the mechanism of LCR and NSFR was studied,which deeply analyzed the effect of two indicators in microprudential view and supervisory boundaries were discussed.After that,procyclicality and risk transfer of Basel III liquidity standard s were studied from two dimensions of time and cross section.In empirical evidence,much attention was put on the fundamental factors,adjustment of liquidity buffers,to test the important conclusions of theoretical analysis.The empirical test mainly consisted of four parts: the first was to check influencing factors of banks’ liquidity buffers,especially on the influence of different business characteristics of banks.The second was to test the impact of implementation of LCR supervision on the bank s’ behavior on liquidity buffer.The third was to test the difference of banks with different business characteristics in procyclical behavior.The fourth was to check the impact of LCR on procyclicality.The following conclusions were brought out.Firstly,the formation mechanisms under three business models were differentiated.Under Traditional Situation,the liquidity risk was mainly due to the insufficient estimation of deposit withdrawal rate(aggregate level)and the disintegration of interbank adjustment mechanism(structural level).At the same time,loan commitment operations with similar risks may also create liquidity gaps.Under the mode of interbank expansion,the decrease of common interest among peers led to decline of optimal interbank lending scale,while short period gave the lender the option of rechoice.Furthermore,lack of capital in non-bank institutions exacerbated liqudity risks.Under the model of Secured Financing and Securitization,the liqiudity risk was mainly due to financial markets,the decline of asset prices could largely increase the haircut rate,leading to the freeze of secured funding market and securitization.The empirical result showed that the business characteristics significantly influenced banks’ liquidity buffers.As the whole banking sector,liquidity buffer was positively correlated to the proportion of core deposits,scale of loan commitment and extent of securitization,while negatively correlated to the proportion of wholesale funding.With liquidity obligation to interbank markets and securitization objects,the systemical important banks took more liquidity risk.Secondly,from the view of micro prudentiality,the Basel III liquidity standards enhanced the liquidity condition of banks,while there was still room for improvement.LCR supervision widely increased the level of banks’ liquidity buffers and and different business characteristics led to different supervisory effects.The banks with high core deposits and large loan commitments increased the most,while the increase of banks with high level of wholesale financing and asset securitization were relatively limited.Generally speaking,the latter two types of banks should have stricter regultion.It showed certain LCR requirements needed to be improved,for instance the outflow rate of deposits and the reference period.NSFR supervision limited the extent of maturity mismatch of banks as a whole and prudently treated the capacity of liquidation of assets,alleviating the liquidity risk in longer time.At the same time,NSFR could also have problems such as overly shortening asset maturities and holding government bonds.Thirdly,from the view of macro prudentiality,the Basel III liquidity standards have problems such as procyclicality and risk transfer.In time dimension,the procyclicality was confirmed on bank’s liquidity buffer adjustments.And banks with larger proportion of core deposits or loan commitment intended to have larger cyclical fluctuations,while banks with larger proportion of wholesale funding or securitization intended to have less cyclical fluctuations.The improvement from LCR was limited while procyclicality remained in uncovered banks and pressure periods.In cross section dimension,liqudity risk could transfer from banks to other financial sectors and non-financial firms.Based on the above analysis,several policy suggestions were brought up,including classified supervision,clarifying regulatory orientations,establishment of counter-cyclical and full covered liquidity supervisory framework.