Stanford University: Liquidity Risk, Market Valuation, And Bank Failures

Abstract
We propose a model that links the conditional probability of bank failure to insolvency and liquidity risks, and show that liquidity risk affects bank failures through systematic and idiosyncratic channels. Empirical results based on U.S. bank data between 1985 and 2011 show that this model outperforms typical accounting-ratio-based models. We find that systematic liquidity risk was a major predictor of bank failures in 2008 and 2009. This finding has important implications for the

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