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The Piggy Bank Index: An intuitive risk measure to assess liquidity and capital adequacy in banks

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  • González, Oliver
  • Keddad, Benjamin

Abstract

This study proposes a new liquidity and capital adequacy risk index, the Piggy Bank Index. This index measures the gap between liquid assets and total liabilities over liquid capital. Using data from the financial statements of 106 US banks during 2004–2009, we show the benefits of this index as an early warning indicator for liquidity and capital adequacy problems. The Piggy Bank Index becomes more effective as the bank failure approaches. The evidence shows that the further and the longer the bank's Piggy Bank Index is out of the 95 % confidence interval of the “healthy” banks, the closer the bank will be to failure. This index was successfully tested for the cases of Merrill Lynch in 2008, and for the case of Silicon Valley Bank, First Republic Bank and Silvergate Bank in 2023.

Suggested Citation

  • González, Oliver & Keddad, Benjamin, 2024. "The Piggy Bank Index: An intuitive risk measure to assess liquidity and capital adequacy in banks," Finance Research Letters, Elsevier, vol. 60(C).
    • Handle: RePEc:eee:finlet:v:60:y:2024:i:c:s1544612323012187
    DOI: 10.1016/j.frl.2023.104846
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    Keywords

    Banking risk; Capital and liquidity adequacy; Risk measure; Bank regulation;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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