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Bank Economic Capital

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Abstract

Conventional measures of bank solvency fail to account for the unique liquidity risks posed by deposits. Using public regulatory data, we develop a novel measure, economic capital, that jointly quantifies the impact of credit, liquidity, and market risk on bank solvency. We validate that economic capital is a more timely and accurate indicator of bank health than standard solvency measures. Using our framework, we examine the evolution of banking sector risk exposures over several decades. Despite significant reforms in the aftermath of the Global Financial Crisis, economic capital suggests that liquidity and market risks have grown and remain elevated.

Suggested Citation

  • Beverly Hirtle & Matthew Plosser, 2025. "Bank Economic Capital," Staff Reports 1144, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednsr:99679
    DOI: 10.59576/sr.1144
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    More about this item

    Keywords

    bank capital; solvency; liquidity; financial stability;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G01 - Financial Economics - - General - - - Financial Crises

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