Bank Capital and Risk: Cautionary or Precautionary?

Beverly Hirtle, Anna Kovner and James Vickery (james.vickery@phil.frb.org)

No 20150202, Liberty Street Economics from Federal Reserve Bank of New York

Abstract: Do riskier banks have more capital? Banking companies with more equity capital are better protected against failure, all else equal, because they can absorb more losses before becoming insolvent. As a result, banks with riskier income and assets would hopefully choose to fund themselves with relatively more equity and less debt, giving them a larger equity cushion against potential losses. In this post, we use a top-down stress test model of the U.S. banking system?the Capital and Loss Assessment under Stress Scenarios (CLASS) model?to assess whether banks that are forecast to lose capital in a severe downturn do indeed have more capital, and how the relationship between capital and risk has evolved over time.

Keywords: Bank Capital; Stress Testing; Financial Stability (search for similar items in EconPapers)
JEL-codes: G2 (search for similar items in EconPapers)
Date: 2015-02-02
New Economics Papers: this item is included in nep-ban
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