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Bank Failures: The Roles of Solvency and Liquidity

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Abstract

Do banks fail because of runs or because they become insolvent? Answering this question is central to understanding financial crises and designing effective financial stability policies. Long-run historical evidence reveals that the root cause of bank failures is usually insolvency. The importance of bank runs is somewhat overstated. Runs matter, but in most cases they trigger or accelerate failure at already weak banks, rather than cause otherwise sound banks to fail.

Suggested Citation

  • Sergio A. Correia & Stephan Luck & Emil Verner, 2026. "Bank Failures: The Roles of Solvency and Liquidity," Liberty Street Economics 20260416, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednls:103048
    DOI: 10.59576/lse.20260416
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    2. Sergio Correia & Stephan Luck & Emil Verner, 2026. "Bank Runs With and Without Bank Failure," Papers 2601.20285, arXiv.org, revised Mar 2026.

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    JEL classification:

    • H0 - Public Economics - - General

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