Economic Capital: A Better Measure of Bank Failure?

Beverly Hirtle and Matthew Plosser

No 20251106, Liberty Street Economics from Federal Reserve Bank of New York

Abstract: Bank failures and distress can be costly to the economy, causing losses to creditors and reducing the flow of credit and other financial intermediation services. Thus, there is significant value in being able to identify “at risk” banks in a timely and accurate way. In a previous post, we presented a new solvency metric, Economic Capital, and showed how solvency risks in the U.S. banking industry have evolved over time according to this measure. In this post, we continue to draw on our recent Staff Report to present analysis showing that Economic Capital identifies failing banks earlier and more accurately than more conventional solvency measures.

Keywords: bank capital; economic capital; bank solvency (search for similar items in EconPapers)
JEL-codes: G20 G21 G28 (search for similar items in EconPapers)
Date: 2025-11-06
New Economics Papers: this item is included in nep-fdg and nep-rmg
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DOI: 10.59576/lse.20251106

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