The Influence of Liquidity Information on Liquidity Holdings in the Banking System

Abstract

I study how liquidity information influences banks' liquidity holdings using the disclosure of liquidity coverage ratio (LCR) mandated for a group of large US banks. While the disclosure rule aims to increase liquidity in the banking system, non-disclosing banks responded by reducing liquidity holdings. Using bank network relationships to measure how much a bank learns from LCR disclosures, I find that banks learning more cut their liquidity significantly more. In the aggregate, liquidity in the banking system declined and systemic risk increased after the disclosure rule adoption. My findings highlight an important, and potentially unanticipated, effect of liquidity disclosure.