Discussion Paper
Factors that Affect Bank Stability
Abstract: In a previous Liberty Street Economics post, we introduced a framework for thinking about the risks banks face. In particular, we distinguished between asset return risk and funding risk that can interact and cause a bank to fail. In our framework, a bank can fail for two reasons: 1-Low asset returns: Fundamental insolvency due to erosion of equity by low asset returns that don’t cover a bank’s debt burden. 2-Loss of funding: Costly liquidation of assets that erode equity.
Keywords: solvency; bank runs; liquidity; Funding models;
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Bibliographic Information
Provider: Federal Reserve Bank of New York
Part of Series: Liberty Street Economics
Publication Date: 2014-02-26
Number: 20140226