Bank Economic Capital

Beverly Hirtle and Matthew Plosser

No 1144, Staff Reports from Federal Reserve Bank of New York

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.

Keywords: bank capital; solvency; liquidity; financial stability (search for similar items in EconPapers)
JEL-codes: G01 G17 G21 (search for similar items in EconPapers)
Pages: 85
Date: 2025-03-01
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DOI: 10.59576/sr.1144

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