Since the aftermath of financial crisis, bank regulators across various international markets started considering and devising different rulebooks. These rulebooks were mainly inclusive of a number of measures for strengthening the scope of resilience throughout the banking industry . A number of efforts have been put in to design new requirements of capital for providing banking with adequate reserves in withstanding crises of the future. As there was suffering of major losses by institutions of finance since the recently stemmed upheaval out of their portfolios of securities, the framework of new capital adequacy has laid increased emphasis in regulating the risks of trading. In the specific sense, the focus of new rules is on market risks; in stressed and normal conditions, these risks are credit risk and liquidity risk . The spreading swap of credit default increased by a number of points, in accompany with the shortage of liquidity across the financial industry.
There have been evidences in the period about the significance of liquidity for the investors, while underlining the need of understanding links between liquidity and credit markets. This suggests that there has been a strong co-movement of liquidity risk and credit risk across the banking industry having a strong relationship. As a result, there can be a development of proxy variable to measure the unexpected ratio of loan default related to the bank. This can be specifically represented through the net losses of loan within the present period in allowing to record the losses of loan This particular variable appears to be crucial in capturing the present risks in loan portfolio of banks, and the accuracy maintained in risk management of bank for the anticipation of losses in loan in the near-term.