Analysis of the Liquidity Situation of the U.S. Banking System in Light of the 2023 Bank Failures

Abstract

The closure of U.S. banks in the spring of 2023 stemmed from a complex interplay of factors. In hindsight, it is possible to identify the macroeconomic trends, balance sheet distortions, and management shortcomings that contributed to the crisis. However, accurately predicting which banks would fail, even with enhanced supervisory oversight, would have been highly unlikely. This study examines whether changes in liquidity—specifically the liquidity coverage ratio (LCR)—could have provided early warning signs of potential problems before the second quarter of 2023. While the analysis does not focus on individual banks, it explores whether signs of distress within a specific group of banks could have alerted regulators. Using publicly available data from the Federal Deposit Insurance Corporation (FDIC), the study employs an estimation method to calculate LCRs based on bank size. The findings reveal three key insights: first, the estimation method is effective, as it closely approximates actual LCR data from large banks’ reports; second, the model successfully identified potential liquidity issues within the group of banks in which some banks ultimately experienced failure; and third, the analysis shows that the liquidity crisis, which coincided with significant interest rate hikes, has since subsided.