Could Basel III Capital and Liquidity Requirements Avoid Bank Failure?

The aim of this study is to examine the contribution of the Basel III requirements in reducing bank failure risk through three different measures: the new long-term liquidity ratio (Net Stable Funding Ratio: NSFR), the Leverage ratio and the capital Tier One ratio. We use data on U.S. commercial banks during the 2008-2010 subprime crisis period. Our results depend on bank size: small banks are more sensitive to their fundamentals than large banks when it comes to failure risk. For large banks, no more safety is driven from the Leverage ratio or from the NSFR when Tier One ratio is applied. We also find that Leverage ratio considering off-balance sheet can be a complementary constraint for reducing bank regulatory arbitrage