Authors: Beverly Hirtle and Matthew C. Plosser
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Staff Reports
Bank Economic Capital
Number 1144
March 2025
March 2025
JEL classification: G21, G17, G01
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.
Author Disclosure Statement(s)
Beverly Hirtle
The author declares that she has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Matthew Plosser
The author declares that he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
The author declares that she has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Matthew Plosser
The author declares that he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Suggested Citation:
Hirtle, Beverly, and Matthew C. Plosser. 2025. “Bank Economic Capital.” Federal Reserve Bank of New York Staff Reports, no. 1144, September. https://doi.org/10.59576/sr.1144
Hirtle, Beverly, and Matthew C. Plosser. 2025. “Bank Economic Capital.” Federal Reserve Bank of New York Staff Reports, no. 1144, September. https://doi.org/10.59576/sr.1144
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