Analysis of the Liquidity Situation of the U.S. Banking System in Light of the 2023 Bank Failures

Kürthy, Gábor and Sáfi, Lilla Tünde (2024) Analysis of the Liquidity Situation of the U.S. Banking System in Light of the 2023 Bank Failures. PÉNZÜGYI SZEMLE/PUBLIC FINANCE QUARTERLY (1963-), 70 (4). pp. 79-97. ISSN 0031-496X

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Abstract

There are complex reasons for the US bank closures in spring 2023. Hindsight analysis reveals the macroeconomic processes, balance sheet distortions and management failures that contributed to the crisis. However, it is unlikely that it would have been possible to predict that the banks that would close were the ones that did close, even if supervisory monitoring had been much more focused. Thus, in our paper we examine the question, focusing only on liquidity, and in particular on the liquidity coverage ratio, whether there were detectable changes before the second quarter of 2023 that, even if not for specific banks, would characterize a well-defined group of banks, i.e. give a signal to supervisors. The question was answered only on the basis of public information published by the Federal Deposit Insurance Corporation using an estimation procedure that calculates the liquidity coverage ratio by bank size. The paper has two important results: first, the estimation procedure itself is workable because it leads to the same result for large banks that can be calculated accurately from individual data; second, we find that the model predicts a potential liquidity problem for precisely the medium-sized group of banks that included the banks that eventually closed.

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