While they have increased slightly in recent years, four key measures of banking system vulnerability remain “significantly smaller” than the period prior to the financial crisis, according to economists at the Federal Reserve Bank of New York. The four measures—capital vulnerability, fire-sale vulnerability, liquidity stress and run vulnerability—are tracked by the New York Fed going back to 2002.
The “capital gap”—the amount needed to bring each large banking firm’s capital ratio up to 10% in a hypothetical crisis—has remained below $100 billion since 2013, down from roughly $200 billion before the crisis and a peak of around $700 billion during the height of the crisis. Meanwhile, the fraction of capital at risk in an environment of asset fire sales under stress has remained near 0.1 since 2014, compared to about 0.25 just before the crisis.
The ratio of liquid liabilities to liquid assets—in which a higher ratio means there may be insufficient liquidity to meet outflows during stressful conditions—has hovered between 0.4 and 0.5 since 2014, down from a range of 0.7 to 0.8 in the pre-crisis years. And an index of run vulnerability that incorporates both liquidity and solvency has remained under 0.2 since 2014, compared with levels above 0.4 before the crisis.