Liquidity Risk and Asset Liability Mismatches: Evidence From South Africa

Using a panel of South African banks covering the period from 2005 t o 2015, we further develop, validate and test the liability mismatch index (LMI) developed by Bai, Krishnamurthy and Weymuller (2018). Deviating from their approach, we develop measures of liquidity that integrate both market liquidity and funding liquidity. Two liquidity measures developed are the bank liquidity mismatch index (BLMI) and the aggregate liquidity mismatch index (ALMI) whose performances are compared and contrasted with the Basel III liquidity measures and traditional liquidity measures. Overall, the two constructed liquidity indices perform better than other liquidity measures. Unlike the LMI, the BLMI and ALMI can be used to evaluate the liquidity of a given bank under liquidity stress events. Our empirical results, though not significant, also show that banks increase their liquidity buffers during times of turmoil as both BLMI and ALMI improved during the period 2007-2009.