Proceedings of the 5th Economic & Finance Conference, Miami

CAN BASEL III LIQUIDITY RISK MEASURES EXPLAIN TAIWAN BANK FAILURES

CHIA-CHIEN CHANG, YUNG -JEN CHUNG

Abstract:

In December 2010, the BCBS (2010a) strengthened its liquidity framework by proposing two quantitative indicators for liquidity risk in Basel III: the liquidity coverage ratio (LCR) and the net stable funding ratio (NSFR). Whether the new liquidity risk indicators are effective to measure the liquidity risk of bank thereby reducing bank failures is an issue of concern. Thus, this study uses a quarterly data of Taiwan banks from 2006 to 2013 and uses the panel multiple regression model to investigate the effectiveness of LCR and NSFR in Taiwan banks. We also study the effectiveness of spread and several liquidity risk indictors used in Taiwan based on Principles for Sound Liquidity Risk Management and Supervision (PSLRMS). Moreover, we test the liquidity risk majored from systematic or non-systematic risk, and consider the size effect and time effect to compare the result. The result shows that all liquidity risk indicators can explain empirical default point (EDD) significantly, for big banks, LCR is more important than NSFR, but for small banks, NSFR is more important. In crisis period, spread and LCR are significant in big banks, but no indicators are significant in small banks. After crisis, both big and small banks are affected by spread, and NSFR and LCR is significant in small bank and in big bank, respectively.

Keywords: Subprime mortgage crisis, Basel III, The Liquidity Coverage Ratio, The Net Stable Funding Ratio, Size effect

DOI: 10.20472/EFC.2016.005.005

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