The Global Risks Alliance (GRA)
Capital absorbs losses and liquidity keeps a bank paying its obligations as they fall due. A bank fails when either runs out, and a liquidity run can bring down a bank whose capital looked adequate. This page explains how capital and liquidity buffers are defined under Basel III, how they behave under stress, how funding can unravel quickly, and how supervisors and central banks use stress tests and facilities to judge whether buffers are enough.
GRA · Established · service level R0
Bank capital and liquidity are the two buffers that keep a bank alive: capital absorbs losses and liquidity keeps it paying obligations as they fall due. A bank fails when either runs out, and a liquidity run can bring down a bank whose capital looked adequate. Basel III defines both, and stress tests probe them.
How physical and transition risk could reach a loan book under different scenarios. Illustrative design values.
Buffers, funding and stress. The dossier below sets out how the risk develops, what is measured, where the data come from, how it is modelled and who decides.
Credit, market and operational losses reduce common equity. As capital ratios approach buffer levels, restrictions on distributions apply and banks may cut lending to rebuild ratios, passing the stress on to borrowers.
Uninsured deposits, wholesale funding and secured financing can be withdrawn within days, faster still with digital banking and rapid information spread. Concentrated deposit bases and maturity mismatch make a run self-reinforcing.
To meet outflows a bank sells assets. Fire sales depress prices, unrealised losses on securities become realised and haircuts widen, so a liquidity problem turns into a capital problem for the seller and for others holding similar assets.
Buffers exist to be drawn down in stress, yet banks may hesitate to use them for fear of market stigma. Central bank facilities and pre-positioned collateral decide whether liquidity support can arrive in time.
Each term as this page uses it. Where a standard-setting body defines the term, the wording follows that body.
| Term | Definition |
|---|---|
| Leverage ratio | Tier 1 capital divided by total exposure, a backstop that ignores risk weights. |
| Net stable funding ratio | Available stable funding relative to required stable funding over one year. |
| Capital buffer | Capital held above minimum requirements that can be drawn down in stress without breaching them. |
Each indicator carries its unit, its cadence, the kind of source behind it and the evidence label a value would carry. No values are shown: a programme supplies them under its own authority.
| Indicator | Unit | Cadence | Source type | Label |
|---|---|---|---|---|
| Common equity tier 1 ratio | percent of risk-weighted assets | quarterly | Supervisory returns, Pillar 3 disclosures | OFFICIAL |
| Leverage ratio | percent of total exposure measure | quarterly | Supervisory returns | OFFICIAL |
| Liquidity coverage ratio | percent of net cash outflows over a thirty-day stress | monthly | Supervisory liquidity returns | OFFICIAL |
| Net stable funding ratio | percent of required stable funding | quarterly | Supervisory returns | OFFICIAL |
| Uninsured deposit share | percent of total deposits | quarterly | Regulatory filings | REPORTED |
| Stressed capital depletion | percentage points of CET1 ratio | annual | Supervisory stress tests | MODELLED |
| Unrealised losses on securities | percent of CET1 capital | quarterly | Financial statements | REPORTED |
| Asset encumbrance ratio | percent of total assets | quarterly | Asset encumbrance reporting | OFFICIAL |
The topic as a computational graph: named sources feed the methods, an evidence review gates the outputs, and the decisions stay with the authorities that hold them.
Fig. 02Nodes carry their type, two metric rows and a state; connectors show what feeds what; dashed frames name the owners; the timeline is the cadence. Design of the pipeline, not a record of a run.
Named public datasets and institutional records, each with its licence class. Sources by agreement are used only under their terms and never republished.
| Source | What it gives | Licence class |
|---|---|---|
| BIS Basel III monitoring reports | Aggregate capital, leverage and liquidity positions of internationally active banks | Free, BIS terms of use |
| Federal Reserve supervisory stress test results | Scenario design, projected losses and post-stress capital for large US banks | Public domain |
| Bank of England stress testing results | Scenario design and outcomes of concurrent and exploratory stress tests for major UK banks | Free, Bank of England terms of use |
| EBA EU-wide stress test | Bank-level stressed capital projections under a common methodology | Free, attribution |
| ECB Supervisory Banking Statistics | Capital adequacy, leverage and liquidity aggregates for significant institutions | Free, attribution |
| IMF Financial Soundness Indicators | Regulatory capital and liquid asset ratios across countries | Free, IMF terms of use |
| Pillar 3 disclosures | Bank-published capital composition, risk-weighted assets, LCR and NSFR | Public, bank terms |
Banking Nexus prepares evidence. The decisions below are taken by the authorities named, under their own rules, and never by the platform.
| Who decides | The question | Evidence this page serves |
|---|---|---|
| Bank board and asset liability committee | What capital target and management buffer to hold, and how to structure funding | Capital and liquidity projections under internal and supervisory scenarios |
| Prudential supervisor through SREP or CCAR | Whether Pillar 2 requirements, guidance or a stress capital buffer should change | Stress test results, ICAAP and ILAAP reviews, peer comparison |
| Macroprudential authority | Whether to raise or release the countercyclical capital buffer | Credit-to-GDP gaps, system-wide stress results, lending conditions |
| Central bank | Which collateral and terms to accept in standing and lender-of-last-resort facilities | Pre-positioned collateral, encumbrance and run scenarios |
How capital and provisions behave under severe but plausible scenarios.
Which deposits and market funding are likely to run in stress, and how fast.
How fire sales, margin calls and funding loss turn liquidity stress into losses.
The effect of digital banking and social media on the speed of deposit outflows.
Leverage means that a small fall in asset values can erase a large share of capital. Capital requirements set minimum buffers, and additional buffers are designed to be usable in stress, though banks may be reluctant to draw on them.
Maturity transformation creates liquidity risk. Banks fund long-term loans with deposits and short-term borrowing that can be withdrawn. Liquid asset buffers and stable funding requirements aim to cover outflows for a period of stress.
Runs are coordination problems. Depositors who fear others will withdraw have reason to withdraw first. Uninsured deposits, concentrated depositor bases and fast digital channels can make outflows sudden.
Liquidity and solvency feed each other. Selling assets in a hurry realizes losses; losses reduce confidence and funding. Central bank facilities exist to break this loop, under their own terms.
Interest rate changes affect both. Rising rates reduce the value of fixed-rate assets and can prompt deposit outflows to higher-yielding alternatives.
| Method or data | What it shows | Its limit |
|---|---|---|
| Stress testing | Capital and liquidity under scenarios | Scenarios may miss the shock that occurs |
| Behavioural funding models | Expected deposit outflows | Calibrated on past behaviour |
| Regulatory reporting | Buffers and funding profiles | Point-in-time; aggregated for research |
| Market indicators | Funding costs and confidence | Noisy and reflexive |
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