Analysis of the Response of American Commercial Banks to Increasing Liquidity Regulations: With a Case Study of Citybank

Youssef Bakiz & Rasmus Paul Fri

Student thesis: Master thesis


Regulators have focused on addressing the major issues and shortcomings that the banking industry showcased in the wake of the global financial crisis. Especially the mismanagement of market liquidity and funding risks exposed the sector to an overall system-wide crisis that ended up impeding on the financial stability of sovereign states thought to otherwise be almost immune to such shocks. The Basel Committee implemented wide-ranging liquidity requirements as part of the Basel III framework, among them most notably can be mentioned the NSFR and LCR requirements.
The nature of this thesis revolves around examining the extent to which American commercial banks have complied with the liquidity requirements in Basel III throughout a regulatory transition period from 2010- 2015, especially in regards to the main tools banks have used in order to optimize their balance sheets, keeping into consideration the trade-off between increasing liquidity and staying profitable. The trend seems to be that the banks have focused on increasing the amount of high-quality liquid assets, and moving towards shorter term loans, combined with longer-term debt obligations.
This paper analyzes the development of bank balance sheets throughout 2010-2015, and the impact that the liquidity regulations might have had on this. Part of this paper is comprised of a case study of Citibank where our objective is to dive deeper into the specifics of their liquidity risk management. The paper is structured as an exploratory study with the aim of developing a calculation tool for a bank’s LCR and NSFR. Based on the previous experiences from existing research, the data is collected from the quarterly Call Reports compiled by FFIEC, including detailed information on all American commercial banks’ balance sheets. This is a difficult task given the novelty and evolving nature of the liquidity risk measures, so we find ourselves needing to base our model on a number of assumptions. We also cannot directly compare our results with those of EBA and BCBS since they use non-public voluntary data that we do not have access to.
The paper contributes to existing literature by being the first to calculate approximate measures of the LCR and NSFR using the specific US versions of the liquidity requirements. The analysis shows that American banks on average are very close to compliance and increased both their LCR and NSFR, even more so when it comes to the G-SIB banks. Furthermore, the distribution around the LCR and NSFR regulatory thresholds grew ever closer to the mean as the banks approached 2015, as exemplified by lower standard deviations and skewness. Our findings are relatively close to what we expected, based on previous studies. We investigate the main considerations for the banks going forward, and the implications for policymakers. We suggest an interesting area for further research would be to provide a more accurate estimation of the NSFR once the final proposal sets in.

EducationsMSc in Finance and Strategic Management, (Graduate Programme) Final Thesis
Publication date2016
Number of pages109