The supervision of bank liquidity has been one of the core topics in the recently developed regulatory framework of banks (Basel III). This paper investigates two issues that have not been addressed in Basel III and which are of particular importance for the attainment of a more effective liquidity regulation. The first is the need for a dynamic definition of liquidity that takes into account the time-varying liquidity and stability of banks’ balance sheet items. The paper develops a new liquidity ratio that explicitly considers this changing nature of liquidity, by assigning weights that depend on financial risks and perceptions. The ratio is estimated and assessed for the EMU-12 countries. The second issue is the need for macro fragility-related liquidity requirements. We provide empirical evidence which suggests that the banking sector does not self-impose such requirements. Based on this evidence, it is argued that the regulatory agents should introduce a positive link between bank liquidity and macroeconomic fragility.
