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This article has been retracted as it is found to contain a substantial amount of material from the published article titled “The Information Value of Basel III Liquidity Risk Measures,” by Dr. Deming Wu and Dr. Han Hong, which is published at The Social Science Research Network on November 19, 2012 without proper citation.

Discrete Dynamics in Nature and Society
Volume 2013 (2013), Article ID 172648, 19 pages
Research Article

Basel III Liquidity Risk Measures and Bank Failure

Faculty of Commerce & Administration, North-West University (Mafikeng), Private Bag x2046, Mmabatho 2735, South Africa

Received 18 April 2013; Accepted 30 May 2013

Academic Editor: Ivan Ivanov

Copyright © 2013 L. N. P. Hlatshwayo et al. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.


Basel III banking regulation emphasizes the use of liquidity coverage and nett stable funding ratios as measures of liquidity risk. In this paper, we approximate these measures by using global liquidity data for 391 hand-selected, LIBOR-based, Basel II compliant banks in 36 countries for the period 2002 to 2012. In particular, we compare the risk sensitivity of the aforementioned Basel III liquidity risk measures to those of traditional measures such as the nonperforming assets ratio, return-on-assets, LIBOR-OISS, Basel II Tier 1 capital ratio, government securities ratio, and brokered deposits ratio. Furthermore, we use a discrete-time hazard model to study bank failure. In this regard, we find that Basel III risk measures have limited ability to predict bank failure when compared with their traditional counterparts. An important result is that a higher liquidity coverage ratio is associated with a higher bank failure rate. We also find that market-wide liquidity risk (proxied by LIBOR-OISS) was the major predictor of bank failures in 2009 and 2010 while idiosyncratic liquidity risk (proxied by other liquidity risk measures) was less. In particular, our contribution is the first to achieve these results on a global scale over a relatively long period for a variety of banks.