Sciences Po Paris
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Institutional Affiliation: Sciences Po Paris
NBER Working Papers and Publications
|October 2016||Measuring Liquidity Mismatch in the Banking Sector|
with Arvind Krishnamurthy, Jennie Bai: w22729
This paper implements a liquidity measure, “Liquidity Mismatch Index (LMI),” to gauge the mismatch between the market liquidity of assets and the funding liquidity of liabilities. We construct the LMIs for 2882 bank holding companies during 2002-2014 and investigate the time-series and cross-sectional patterns of banks' liquidity and liquidity risk. Aggregate banking sector liquidity worsens from +$4 trillion before the crisis to -$6 trillion in 2008, and reverses back to the pre-crisis level in 2009. We also show how a macro-prudential liquidity stress test can be conducted with the LMI metric, and that such a stress test could have revealed the fragility of the banking system in early 2007. In the cross section, we find that banks with more ex-ante liquidity mismatch have a higher stock...