The Influence of Liquidity Information on Liquidity Holdings in the Banking System

I study how liquidity information influences banks' liquidity holdings, using the disclosure of bank liquidity coverage ratio (LCR) mandated for a group of large US banks. While the disclosure rule aims to increase liquidity in the banking system, I find that non-disclosing banks responded by reducing liquid asset holdings due to the impact of liquidity information on banks' strategic interactions in holding liquidity. I use bank network relationships to measure how much a bank learns from the disclosure, and find that banks learning more cut their liquidity significantly more. In the aggregate, the new disclosure rule lowered liquidity in the banking system, concentrated liquidity within a group of large disclosing banks, and ultimately increased systemic risk. My findings highlight the important, and potentially unanticipated, influence of liquidity information on the liquidity and stability of the banking system.