The Market Liquidity Of Designated 2B Equity Securities Under The Basel Accord: Empirical Evidence From South African Commercial Banks

Abstract

Purpose: The financial market liquidity of an asset has always been an important concept in banking and financial markets because it keeps leveraging in check. The objective of this study was to investigate the market liquidity of the level 2B common equity in the Liquidity Coverage Ratio and Net Stable Fund Ratio. Market liquidity measures where modelled and tested empirically to validate whether the LCR and NSFR needs to be improved. Methodology: This study used a sample period from May 2016 – May 2021, and a fixed effect model to investigate the market liquidity of the selected level 2B High Quality Liquid Assets. Findings: The findings of this study indicates that the common equity securities that qualifies to be included in level 2B HQLA category lack market depth. This was evident in the significant relationship between the independent and dependent variables used in this study although there was no significant relationship between transaction cost and price effect. Therefore, there was sufficient evidence that the LCR and NSFR measures for liquidity management in the banking sector needs to be improved. Originality/Value: An improved LCR and NSFR was suggested in addition to a specialist system in order to capture the volatility of the level 2B equity securities and improve the market liquidity of these assets. As per the author’s knowledge, this study is the first study to empirically investigate the liquidity of the selected level 2B HQLAs.