Abstract
Basel III liquidity risk framework introduces two standards for global liquidity risk management which are liquidity coverage ratio (LCR) and net stable funding ratio (NSFR), and suggests authorities to promote the implementation of the requirements steadily. Based on the guiding principles of the framework and the reality of financial industry in Taiwan, the proper measurements for LCR and NSFR can be constructed using public information such as financial reports of all the 37 banks in Taiwan by the end of 2010. After measuring, we can find that foreign banks manage their liquidity risk significantly better than the local ones. Although public share banks all have NSFRs above 100%, some of them do not meet the LCR requirement, highlighting the lack of sound short-term liquidity risk management. Private banks show larger differences in these two indicators due to various business strategies and several of them cannot meet neither of the requirements which the authorities should pay more attention to. Finally, in order to assess the possible impact of the new framework on the banking sector, we apply the results of 25 sample banks to a financial systemic risk model integrating credit, contagion and liquidity risk, in which the liquidity risk is valued by option.