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.
Capital and liquidity on the record.
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.
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.
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Uninsured deposits, wholesale funding and secured financing can be withdrawn within days, faster still with digital banking and rapid information spread.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.
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.
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.
A loan book under scenario families.
How physical and transition risk could reach a loan book under different scenarios. Illustrative design values.
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.
| Indicator | Unit | Cadence | Source type | Label |
|---|---|---|---|---|
| Common equity tier 1 ratio | percent of risk-weighted assets | quarterly | Supervisory returns, Pillar 3 disclosures | Published statistics |
| Leverage ratio | percent of total exposure measure | quarterly | Supervisory returns | Published statistics |
| Liquidity coverage ratio | percent of net cash outflows over a thirty-day stress | monthly | Supervisory liquidity returns | Published statistics |
| Net stable funding ratio | percent of required stable funding | quarterly | Supervisory returns | Published statistics |
| 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 | Published statistics |
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
| Round | System equity lost (%) | Banks in default |
|---|---|---|
| 0 | 18.00 | 0 |
| 1 | 28.80 | 0 |
| 2 | 35.28 | 0 |
| 3 | 39.17 | 0 |
| 4 | 41.50 | 0 |
| 5 | 42.90 | 0 |
| 6 | 43.74 | 0 |
| 7 | 44.24 | 0 |
| 8 | 44.55 | 0 |
| 9 | 44.73 | 0 |
| 10 | 44.84 | 0 |
| 11 | 44.90 | 0 |
| 12 | 44.94 | 0 |
| 13 | 44.96 | 0 |
| 14 | 44.98 | 0 |
| 15 | 44.99 | 0 |
| 16 | 44.99 | 0 |
| 17 | 45.00 | 0 |
| 18 | 45.00 | 0 |
| 19 | 45.00 | 0 |
| 20 | 45.00 | 0 |
| 21 | 45.00 | 0 |
| 22 | 45.00 | 0 |
| 23 | 45.00 | 0 |
| 24 | 45.00 | 0 |
| 25 | 45.00 | 0 |
| 26 | 45.00 | 0 |
| 27 | 45.00 | 0 |
| 28 | 45.00 | 0 |
| 29 | 45.00 | 0 |
| 30 | 45.00 | 0 |
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
- Clearing in financial networks Eisenberg and Noe (2001), Management Science 47
- Uncertainty fan (parameter Monte Carlo) Spiegelhalter, Pearson and Short (2011), Visualising uncertainty about the future, Science 333
- 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.
Across the six pillars, led by Nexus Consortium
- Experiments Labs
- Built in Banking Nexus in Foundry
- Tested at Banking Nexus in Universe
- Codified in Finance, Insurance and the Economy in Standards
- Published in Banking Nexus in Reports
- Taught in Faculty of Finance and Economics in Academy
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.
| 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 |
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)
Systems and couplings
- Banking
- Central banks and financial supervisors Coupling
- Insurance and reinsurance Coupling
- Cities and the built environment Coupling
- Digital, telecom and platforms Coupling
Controls
NS-0Constitution and principlesNS-3Risk record UNIs (grammar, legacy crosswalk, allocation authority)NS-9Contextual UNIs (deployments, instances, programme instances)NS-10Policies and clauses (machine-readable obligations: definition, binding, evaluation and enforcement)NS-11Verification and monitoring (evidence, attestations, zero-trust conformance observation)NS-14Conformance and crosswalk to external standardsNRS-U2Universe platform profile: Banking NexusNRS-F2Banking climate, nature and transition riskNRS-H113Hazard family: Financial-system fragility (NHS-1 soc.financial-system)NRS-K20Domain pack profile: Climate adaptation (DOMAIN-020)NRS-U8Universe platform profile: Energy NexusNRS-D1Risk-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
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 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 |
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
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.
| Indicator | Unit | Who reads it | Framework |
|---|---|---|---|
| CET1 ratio | % of risk-weighted assets | Banks, supervisors | Basel framework |
| Liquidity coverage ratio | % of stressed outflows | Banks, central banks | Basel framework |
| Solvency ratio | % of solvency capital requirement | Insurers, supervisors | IAIS Insurance Core Principles |
| Combined ratio | % of earned premium | Insurers | Actuarial practice |
| Protection gap | uninsured share of economic loss | Insurers, ministries of finance | Published loss statistics |
| Public debt | % of GDP | Ministries of finance, IMF | Debt Sustainability Framework |
| Gross financing needs | % of GDP per year | Ministries of finance, investors | Debt Sustainability Framework |
Shared questions the industry asks.
- 01
How much loss can buffers absorb?
How capital and provisions behave under severe but plausible scenarios.
- 02
How stable is funding?
Which deposits and market funding are likely to run in stress, and how fast.
- 03
How do liquidity and solvency interact?
How fire sales, margin calls and funding loss turn liquidity stress into losses.
- 04
How do new channels change runs?
The effect of digital banking and social media on the speed of deposit outflows.
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.
How evidence is gathered, and where it stops.
| 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 |
How it is studied, and what the methods cannot say.
- 01Financial and risk engineeringExpected credit loss modelling · Counterparty exposure and valuation adjustmentsApplied here
- 02Financial economics and macro-financeMacro-financial stress scenarios · Credit cycle and buffer calibrationApplied here
- 03Probability and statisticsEstimating default and loss parameters · Operational loss modellingApplied here
- 04Network science and contagionInterbank and counterparty contagion · Overlapping portfolios and fire salesApplied here
Questions and answers.
Why do banks need both capital and liquidity?
What is the difference between a requirement and a buffer?
What does a supervisory stress test show?
Why can modern bank runs move so fast?
Does GRA comment on any bank's capital adequacy?
Why can a solvent bank fail?
Are GRA scenarios regulatory stress tests?
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