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Factors that Affect Bank Stability

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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.

Suggested Citation

  • Thomas M. Eisenbach & Tanju Yorulmazer, 2014. "Factors that Affect Bank Stability," Liberty Street Economics 20140226, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednls:86928
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    More about this item

    Keywords

    solvency; bank runs; liquidity; Funding models;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • G1 - Financial Economics - - General Financial Markets

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