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A bank or other financial institution is potentially subject to at least four types of risk: (1) Credit risk -- defaults or delays in repayments. (2) Fraud -- embezzlement or insider abuse. (3) Liquidity risk -- or high cost of obtaining needed cash. (4) Interest rate risk -- differential changes in the value of assets and liabilities as interest rates shift. This paper reports a study of the interest-rate elasticity of the net worth of a commercial bank. Most of the study is devoted to the development of the necessary methodology to measure the interest-rate elasticity (IRE) of a bank's asset/liability mix. The report is organized into four major sections. The first summarizes the history of interest-rate elasticity models and points out the problems in applying them to bank assets and liabilities. An analytical framework is then developed to calculate the IRE of a portfolio of assets and liabilities. The next three sections apply the framework to a simulated bank. For simplicity, the bank is assumed to have only two classes of assets (commercial loans and cash) and three classes of liabilities(demand deposits, large denomination CD's, and capital). The second section develops models of the cash flows associated with each of the assets and liabilities. The third section quantifies the parameters necessary to calculate the net worth and IRE measures, and the fourth section details the design of a simulation and some simulation results for the 1973-75 period. The report concludes with a discussion of the regulatory implications of the study.

Bank capital.

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Bank capital --- Credit unions

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This paper provides a formal setting for the analysis of the capital adequacy of an institution with deposits insured by a third party. An insured depositor has a claim against the institution and a contingent claim against the insurer. This paper analyzes the effect of the riskiness of the asset mix and the relative amount of deposits and capital on the potential liability of the insurer. It shows that an increase in asset risk, holding value constant, increases the value of equity and raises the potential liability of the insurer.

Bank capital. --- Deposit insurance.

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Bank capital -- England -- Manchester

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The appropriate level of bank capital and, more generally, a bank's capacity to absorb losses, has been at the core of the post-crisis policy debate. This paper contributes to the debate by focusing on how much capital would have been needed to avoid imposing losses on bank creditors or resorting to public recapitalizations of banks in past banking crises. The paper also looks at the welfare costs of tighter capital regulation by reviewing the evidence on its potential impact on bank credit and lending rates. Its findings broadly support the range of loss absorbency suggested by the Financial Stability Board (FSB) and the Basel Committee for systemically important banks.

Bank capital. --- Banks and banking.