Because banks are always managing the same dollar value in liabilities as they hold in assets (unlike most companies who would never tolerate such a risky leverage ratio), their liquidity is usually monitored closely by the country's regulators. A deterioration in the quality of assets can quickly jeopardise the bank's ability to meet its liabilities as we saw in the 2007-8 Global Financial Crisks. So the place to start when evaluating a bank's liquidity is the Basel III guidance and related tier 1, 2 and CET1 ratios. Here is a link:

https://www.bis.org/bcbs/basel3.htm

Hi Malihe, liquidity have many dimensions in Economics and Finance. Even, in Finance we talk as well as liquidity in bankig as in stock markets. You seems to be focused on banks and the common measure is the liquid assets to total assets ratio.

best

Hi Malihe,

first, as Jamel said, liquidity have many dimensions. Liquidity risk is divided into two types: funding liquidity risk (aka cash-flow risk) and market liquidity risk (aka asset/product risk). There are at least three perspectives on market liquidity. The best and most common way is to Calculate liquidity risk with by finding the difference between the bid and ask spread.

Here are links about this issue:

https://www.sapling.com/6538967/calculate-liquidity-risk and https://www.investopedia.com/articles/trading/11/understanding-liquidity-risk.asp

Funding liquidity that includes a stressed liquidity coverage ratio (LCR) requirement and a longer-term Net Stable Funding Ratio (NSFR).

The LCR should ensure that the bank has a sufficient amount of liquid assets to survive 30 days of stressed liquidity conditions characterized by several funding shocks including a partial loss of deposits and a complete loss of wholesale funding. The requirement will be,

(High Quality Liquid Assets/Net Cash Outflow in a 30 - Day Period)>=1

The NSFR will require banks to have a satisfactory amount of stable sources of funding in relation to the liquidity of the banks’ assets. This is aimed at

reducing the maturity mismatch between assets and liabilities in banks. The requirement will be,

(Amount of Stable Funding/Required Amount of Stable Funding)>=1

As a bank supervisor starting out in my career 20 years ago, i referred to the US federal reserve manual to understand the various quantitative and qualitative measures to assess liquidity risk in the banks under their purview. I believe this is still available in their website. The rating agencies methodologies are also a good source to start.

To add to other respondents, Basel 3 ratios namely LCR and NSFR are the key ratios being looked at these days as they capture many facets of liquidity risk. However be mindful that not all jurisdictions have adopted Basel 3. Therefore the data coverage will be incomplete. The more traditional ratios such as liquid asset ratio (as percentage over total deposits) are more easily obtainable but the ratio is too basic and not risk sensitive. Bear in mind as well that in many instances these ratios (both recent and traditional ones) may be the result of a bank's liquidity risk management and not the leading indicators of liquidity risk inherent in a bank.

Dear Malihe, Liquidity risk is happen due to failure in managing asset and liability. In bank, asset commonly concentrate on receivable (lending) and liability comes from customer deposit and loan as well. Liquidity risk could happen when there is gap between asset an liability, e.g tenure of receivables longer than loan or fix receivables rate which is loan is floating rate or fluctuation of loan currency rate which is different with assets currency.

Dear Malihe

This link provides a synopsis of bank liquidity metrics sourced from a collection of authoritative articles:

https://www.sciencedirect.com/topics/economics-econometrics-and-finance/bank-liquidity

Dear Malihe,

Liquidity risk has many meanings depending on many factors and its use with financial institutions: e.g., Balance sheet liquidity risk, adverse price impact, and transaction cost (bid-ask spread).

I have developed liquidity risk models for portfolio management purposes and for risk management within trading portfolios using the concept of Liquidity-Adjusted Value-at-Risk (LVaR).

You can examine my model (known in certain academic literature as “Al Janabi Model” for liquidity risk management, including portfolio management, see for instance: Madoroba, S. B. W., & Kruger, J. W. (2014), "Liquidity effects on value-at-risk limits: Construction of a new VaR model," Journal of Risk Model Validation, Vol. 8, pp. 19–46.)

You can refer to some of my single-authored and coauthored publications in renowned journals, detailed as follows:

1. Al Janabi, Mazin A. M., Ferrer, Roman, and Shahzad, Syed Jawad Hussain, “Liquidity-adjusted value-at-risk optimization of a multi-asset portfolio using a vine copula approach”. Physica A: Statistical Mechanics and its Applications, Vol. 536, 122579, 2019. [Publisher: Elsevier, Inc.]

2. Al Janabi, Mazin A. M., Grillini, Stefano, Sharma, Abhijit, Ozkan, Aydin, “Pricing of time-varying illiquidity within the Eurozone: Evidence using a Markov switching liquidity-adjusted capital asset pricing model“. International Review of Financial Analysis, Vol. 64, pp. 145-158, 2019. [Publisher: Elsevier, Inc.]

3. Al Janabi, Mazin A. M., Arreola Hernandez, Jose, Berger, Theo, Khuong Nguyen, Duc, “Multivariate Dependence and Portfolio Optimization Algorithms under Illiquid Market Conditions”, European Journal of Operational Research, Vol. 259, No. 3, pp. 1121-1131, 2017. [Publisher: Elsevier, Inc.]

4. Al Janabi, Mazin A. M., “Scenario Optimization Technique for the Assessment of Downside-Risk and Investable Portfolios in Post-Financial Crisis”, Int. J. of Financial Engineering (Formerly, Journal of Financial Engineering), Vol. 2, No. 3, pp. 1550028-1 to 1550028-28, 2015.

[Publisher: World Scientific Publishing Co., Inc.]

5. Al Janabi, Mazin A. M., “Optimal and Investable Portfolios: An Empirical Analysis with Scenario Optimization Algorithms under Crisis Market Prospects”, Economic Modelling, Vol. 40, pp. 369-381, 2014. [Publisher: Elsevier, Inc.]

6. Al Janabi, Mazin A. M., “Optimal and Coherent Economic-Capital Structures: Evidence from Long and Short-Sales Trading Positions under Illiquid Market Perspectives”, Annals of Operations Research, Vol. 205, No.1, pp. 109-139, 2013. [Publisher: Springer Publishing Co., Inc.]

7. Al Janabi, Mazin A. M., “Optimal Commodity Asset Allocation with a Coherent Market Risk Modeling”, Review of Financial Economics, Vol. 21, No. 3, pp. 131-140, 2012. [Publisher: Elsevier, Inc.]

8. Al Janabi, Mazin A. M., “A Generalized Theoretical Modeling Approach for the Assessment of Economic Capital under Asset Market Liquidity Risk Constraints”, The Service Industries Journal, Vol. 31, No. 13 & 14, pp. 2193-2221, 2011. [Publisher: Routledge; Taylor & Francis Group]

9. Al Janabi, Mazin A. M., “Dynamic Equity Asset Allocation with Liquidity-Adjusted Market Risk Criterion: Appraisal of Efficient and Coherent Portfolios”, Journal of Asset Management, Vol. 12, No. 6, pp. 378-394, 2011. [Publisher: Palgrave Macmillan Publishers, Ltd.]

I hope it is useful!

Best Regards

Prof. Dr. Mazin A. M. Al Janabi

Full Professor of Finance & Banking and Financial Engineering

EGADE Business School, Tecnologico de Monterrey,

Santa Fe Campus, Mexico City, Mexico.

based on the literature, liquidity risk have many proxies

some studies had conducted the Basel three liquidity ratios (NSFR) others have used (LTCD) loan to core deposits.

One of the prime measurement of liquidity risk is the application of the Current Ratio. Current ratio = current assets/current liabilities. The current ratio is the value of current or Short-term liabilities as per Current Liabilities.