Report
Bank Economic Capital
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. 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 solvency and find that following the GFC low interest rates depressed economic capital even as liquidity and market risks grew. We conclude with several examples that highlight additional applications.
JEL Classification: G01; G17; G21;
https://doi.org/10.59576/sr.1144
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Provider: Federal Reserve Bank of New York
Part of Series: Staff Reports
Publication Date: 2025-03-01
Number: 1144
Note: Revised October 2025.