How Useful Is Basel III's Liquidity Coverage Ratio? Evidence from U.S. Bank Holding Companies

This paper approximates a construction of Basel III's Liquidity Coverage Ratio (LCR) for U.S. bank holding companies. This study examines: (i) the LCR's marginal contribution to a firm's systemic risk and, (ii) whether the LCR can predict ex ante which banks are most exposed to systemic losses in a true systemic event. Panel regressions from 2002 to 2015 show that the LCR is associated with lower relative systemic risk, measured by ΔCoVaR, as proposed by Adrian and Brunnermeier (2016). The LCR may be used conjunctively with marginal expected shortfall to predict a firm's systemic losses during the crisis of 2007-2008