GRA · Banking Nexus

Spatial financeWhere capital meets hazard, exposure and transition

Capital and liquidity

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.

01Register

Capital and liquidity on the record.

02The question

Capital and liquidity: how the risk develops.

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.

Mechanism

Losses deplete capital

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.

Mechanism

Funding can run quickly

Uninsured deposits, wholesale funding and secured financing can be withdrawn within days, faster still with digital banking and rapid information spread.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.

Mechanism

Liquidity stress becomes solvency stress

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.

Mechanism

Buffers have to be usable

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.

03Spatial finance

A loan book under scenario families.

How physical and transition risk could reach a loan book under different scenarios. Illustrative design values.

A loan book across Europe under physical and transition risk.Design values; NGFS scenario names are labels only, not stress test results.
04Indicators

What is measured, and how well.

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.

IndicatorUnitCadenceSource typeLabel
Common equity tier 1 ratiopercent of risk-weighted assetsquarterlySupervisory returns, Pillar 3 disclosuresPublished statistics
Leverage ratiopercent of total exposure measurequarterlySupervisory returnsPublished statistics
Liquidity coverage ratiopercent of net cash outflows over a thirty-day stressmonthlySupervisory liquidity returnsPublished statistics
Net stable funding ratiopercent of required stable fundingquarterlySupervisory returnsPublished statistics
Uninsured deposit sharepercent of total depositsquarterlyRegulatory filingsREPORTED
Stressed capital depletionpercentage points of CET1 ratioannualSupervisory stress testsMODELLED
Unrealised losses on securitiespercent of CET1 capitalquarterlyFinancial statementsREPORTED
Asset encumbrance ratiopercent of total assetsquarterlyAsset encumbrance reportingPublished statistics
05Stress test

How a shock to assets becomes a system loss.

The equity the system loses after interbank contagion, against the initial hit, as leverage, interconnection and recovery rates change, the core of a macroprudential stress test. Teaching model with stated illustrative values, not a prediction. The map on this page shows Western Europe; the model itself is not tied to a place.

Controls

Fall in external assets
2.0%
Leverage (assets over equity)
10 times
Interbank share of assets
10%
Recovery on interbank claims
40%
Banks in the system
20
Core banks
20% of banks

Readouts

Equity lost to the initial shock
18.0%
Equity lost after contagion
45.0%
Added by contagion (DebtRank)
27.0 points
Banks in default
0
Numbers, methods and sources
RoundSystem equity lost (%)Banks in default
018.000
128.800
235.280
339.170
441.500
542.900
643.740
744.240
844.550
944.730
1044.840
1144.900
1244.940
1344.960
1444.980
1544.990
1644.990
1745.000
1845.000
1945.000
2045.000
2145.000
2245.000
2345.000
2445.000
2545.000
2645.000
2745.000
2845.000
2945.000
3045.000

Methods

  1. DebtRank Battiston and others (2012), Scientific Reports 2:541
  2. Differential DebtRank Bardoscia and others (2015), PLOS ONE 10
  3. Contagion in financial networks Gai and Kapadia (2010), Proc. R. Soc. A 466
  4. Clearing in financial networks Eisenberg and Noe (2001), Management Science 47
  5. Uncertainty fan (parameter Monte Carlo) Spiegelhalter, Pearson and Short (2011), Visualising uncertainty about the future, Science 333
  6. One-at-a-time sensitivity (tornado) Saltelli and others (2008), Global Sensitivity Analysis: The Primer, Wiley

Data

No observed data enters this model: it runs on the teaching values set by the controls, to be replaced with a programme's own evidence.

How a shock to assets becomes a system loss. Illustrative teaching model: it runs on the values set by the controls, not on measured data. Methods: DebtRank (Battiston and others (2012), Scientific Reports 2:541); Differential DebtRank (Bardoscia and others (2015), PLOS ONE 10); Contagion in financial networks (Gai and Kapadia (2010), Proc. R. Soc. A 466).

Across the six pillars, led by Nexus Consortium

06Sources

Where the evidence comes from.

Named public datasets and institutional records, each with its licence class. Sources by agreement are used only under their terms and never republished.

SourceWhat it givesLicence class
BIS Basel III monitoring reportsAggregate capital, leverage and liquidity positions of internationally active banksFree, BIS terms of use
Federal Reserve supervisory stress test resultsScenario design, projected losses and post-stress capital for large US banksPublic domain
Bank of England stress testing resultsScenario design and outcomes of concurrent and exploratory stress tests for major UK banksFree, Bank of England terms of use
EBA EU-wide stress testBank-level stressed capital projections under a common methodologyFree, attribution
ECB Supervisory Banking StatisticsCapital adequacy, leverage and liquidity aggregates for significant institutionsFree, attribution
IMF Financial Soundness IndicatorsRegulatory capital and liquid asset ratios across countriesFree, IMF terms of use
Pillar 3 disclosuresBank-published capital composition, risk-weighted assets, LCR and NSFRPublic, bank terms
07Twin and cascade simulator

Trace a shock in capital and liquidity to the balance sheet.

Assembled from the Nexus Standards area profile Banking: the shocks it names, the systems and sectors that carry the loss, the controls that dampen it and the data that observe it. Pick an initiating shock and step through the cascade to see which exposures it reaches and where losses could concentrate. The Map view places the run on an example geography with open data. Every weight is a stated assumption. An exercise, not a forecast, a valuation, a rating or investment advice. To model a place of your own choosing, open the full System Builder.

Hazards

  • Tropical cyclone
  • Earthquake
  • Ice-jam flood
  • Wildfire
  • Dam failure
  • Sea-ice loss
  • Storm surge (set off downstream)
  • Intense rainfall (set off downstream)
  • River flood (set off downstream)
  • Flash flood (set off downstream)
  • Dangerous surf (set off downstream)
  • Widespread power outage (set off downstream)
  • Mass displacement (set off downstream)
  • Coastal flood (set off downstream)
  • Coastal erosion (set off downstream)
  • Aftershock sequence (set off downstream)
  • Fault surface rupture (set off downstream)
  • Soil liquefaction (set off downstream)

Controls

  • NS-0 Constitution and principles
  • NS-3 Risk record UNIs (grammar, legacy crosswalk, allocation authority)
  • NS-9 Contextual UNIs (deployments, instances, programme instances)
  • NS-10 Policies and clauses (machine-readable obligations: definition, binding, evaluation and enforcement)
  • NS-11 Verification and monitoring (evidence, attestations, zero-trust conformance observation)
  • NS-14 Conformance and crosswalk to external standards
  • NRS-U2 Universe platform profile: Banking Nexus
  • NRS-F2 Banking climate, nature and transition risk
  • NRS-H113 Hazard family: Financial-system fragility (NHS-1 soc.financial-system)
  • NRS-K20 Domain pack profile: Climate adaptation (DOMAIN-020)
  • NRS-U8 Universe platform profile: Energy Nexus
  • NRS-D1 Risk-informed development and project screening

Observation

  • BIS statistics (banking, credit, debt securities, property prices) (listed for reference)
  • IMF data services (IFS, FSI, WEO, GFS) (listed for reference)
  • World Development Indicators (listed for reference)
  • GLEIF Golden Copy (LEI Level 1 and Level 2 data) (listed for reference)
  • Bank capital to assets ratio (%)
  • Bank nonperforming loans to total gross loans (%)
  • Domestic credit to private sector (% of GDP)
  • (a) Number of commercial bank branches per 100,000 adults and (b) number of automated teller machines (ATMs) per 100,000 adults

Example geography

  • Western Europe: 152 hexagonal cells
  • Rain rate, last half hour (IMERG), NASA GIBS
  • Night lights tonight, outages (VIIRS Day/Night Band), NASA GIBS
  • Surface water through cloud, 30 m (OPERA DSWx-S1 radar), NASA GIBS
  • Carbon monoxide, smoke transport (AIRS), NASA GIBS
08Decisions

Who decides, and what the evidence serves.

Banking Nexus prepares evidence. The decisions below are taken by the authorities named, under their own rules, and never by the platform.

Who decidesThe questionEvidence this page serves
Bank board and asset liability committeeWhat capital target and management buffer to hold, and how to structure fundingCapital and liquidity projections under internal and supervisory scenarios
Prudential supervisor through SREP or CCARWhether Pillar 2 requirements, guidance or a stress capital buffer should changeStress test results, ICAAP and ILAAP reviews, peer comparison
Macroprudential authorityWhether to raise or release the countercyclical capital bufferCredit-to-GDP gaps, system-wide stress results, lending conditions
Central bankWhich collateral and terms to accept in standing and lender-of-last-resort facilitiesPre-positioned collateral, encumbrance and run scenarios

Outputs this topic produces

  • Explainers on the Basel III capital stack, buffers and liquidity ratios
  • Comparative notes on supervisory stress test designs and their assumptions
  • Liquidity run and fire-sale scenario narratives for training and exercises
  • Research on the usability of buffers and on central bank liquidity facilities
09Exposure, loss and capital

What capital and liquidity means for exposure, loss and capital.

The exposure, loss, scenario and capital views a risk officer, supervisor or ministry of finance would ask for, with the frameworks they report against. Structures follow supervisory and actuarial practice. Values are illustrative: never prices, ratings or advice.

Capital, solvency and fiscal indicators

The indicators a risk officer, supervisor or ministry of finance reads first on capital and liquidity.

IndicatorUnitWho reads itFramework
CET1 ratio% of risk-weighted assetsBanks, supervisorsBasel framework
Liquidity coverage ratio% of stressed outflowsBanks, central banksBasel framework
Solvency ratio% of solvency capital requirementInsurers, supervisorsIAIS Insurance Core Principles
Combined ratio% of earned premiumInsurersActuarial practice
Protection gapuninsured share of economic lossInsurers, ministries of financePublished loss statistics
Public debt% of GDPMinistries of finance, IMFDebt Sustainability Framework
Gross financing needs% of GDP per yearMinistries of finance, investorsDebt Sustainability Framework
Source: the frameworks named in each row. Indicator names, units and frameworks only; values belong to each institution's own reporting and are never shown here.
NGFS climate scenarios · Network for Greening the Financial SystemIFRS S2 Climate-related Disclosures · ISSBTCFD recommendations · Financial Stability Board TCFDPrinciples for the effective management of climate-related financial risks · Basel Committee on Banking Supervision
10Core questions

Shared questions the industry asks.

  1. 01

    How much loss can buffers absorb?

    How capital and provisions behave under severe but plausible scenarios.

  2. 02

    How stable is funding?

    Which deposits and market funding are likely to run in stress, and how fast.

  3. 03

    How do liquidity and solvency interact?

    How fire sales, margin calls and funding loss turn liquidity stress into losses.

  4. 04

    How do new channels change runs?

    The effect of digital banking and social media on the speed of deposit outflows.

11Mechanisms

How the risk arises and transmits.

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 realises 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.

12Methods and limits

How evidence is gathered, and where it stops.

Method or dataWhat it showsIts limit
Stress testingCapital and liquidity under scenariosScenarios may miss the shock that occurs
Behavioural funding modelsExpected deposit outflowsCalibrated on past behaviour
Regulatory reportingBuffers and funding profilesPoint-in-time; aggregated for research
Market indicatorsFunding costs and confidenceNoisy and reflexive
13Methods

How it is studied, and what the methods cannot say.

  1. Financial and risk engineeringExpected credit loss modelling · Counterparty exposure and valuation adjustmentsApplied here
  2. Financial economics and macro-financeMacro-financial stress scenarios · Credit cycle and buffer calibrationApplied here
  3. Probability and statisticsEstimating default and loss parameters · Operational loss modellingApplied here
  4. Network science and contagionInterbank and counterparty contagion · Overlapping portfolios and fire salesApplied here
14Questions

Questions and answers.

Why do banks need both capital and liquidity?
Capital absorbs losses so a bank stays solvent; liquidity lets it meet payments as they fall due. A solvent bank can fail if it cannot fund itself, and ample liquidity cannot save a bank whose losses exceed its capital.
What is the difference between a requirement and a buffer?
Minimum requirements must be met at all times. Buffers sit above them and can be drawn down in stress, with automatic limits on distributions such as dividends and bonuses as the buffer is used.
What does a supervisory stress test show?
How a bank's capital would evolve under a severe but plausible scenario set by the supervisor. It tests resilience to that scenario; it is not a forecast of what will happen.
Why can modern bank runs move so fast?
Concentrated uninsured deposits, mobile banking and rapid spread of information allow withdrawals at a pace that older liquidity assumptions did not anticipate.
Does GRA comment on any bank's capital adequacy?
No. It assesses no bank. Research uses aggregated data and published frameworks.
Why can a solvent bank fail?
Because if it cannot meet outflows, it may have to sell assets at a loss or close, even if its assets exceed its liabilities over time.
Are GRA scenarios regulatory stress tests?
No. They are research scenarios and set no requirement.
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