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Liquidity Risk at Large U.S. Banks

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  • Laurence Ball

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.

Suggested Citation

  • Laurence Ball, 2023. "Liquidity Risk at Large U.S. Banks," Journal of Law, Finance, and Accounting, now publishers, vol. 7(2), pages 229-272, May.
    • Handle: RePEc:now:jnllfa:108.00000064
    DOI: 10.1561/108.00000064
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    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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