Hirtle and Plosser argue in Liberty Street Economics for Economic Capital

Hirtle and Plosser argue in Liberty Street Economics for Economic Capital

Published November 6, 2025, Beverly Hirtle and Matthew C. Plosser argue that Economic Capital, especially R-EC, identifies failing banks earlier and more accurately than conventional accounting-based measures. Economic Capital estimates the present value of a bank’s assets, liabilities, and necessary operating expense, accounting for changes in value as interest rates and credit spreads change. R-EC measures Economic Capital assuming uninsured depositors run on the bank. In the authors’ analysis of the March 2023 bank failures, R-EC signaled high insolvency risk under a run scenario well ahead of actual events; accounting-based measures gave less clear signals. Across a historical sample dominated by credit-related failures, the authors’ models also found R-EC more accurate than TCE and MTM TCE at both tested horizons. They argue that accounting-based measures assume a bank continues as a going concern, an assumption that may not capture withdrawals. The authors conclude that Economic Capital could supplement existing metrics for monitoring individual banks and banking-system risks. Their analysis does not establish how the measure would perform as an operational monitoring tool.

Publication: fd85d630-4730-30b3-3655-afe296534b92

attribution — pass: The reading correctly attributes the argument to Beverly Hirtle and Matthew C. Plosser in the New York Fed's Liberty Street Economics. It is one authored post, not a listing. Findings are framed as the authors' analysis and conclusions.

Beverly Hirtle and Matthew C. Plosser, “Economic Capital: A Better Measure of Bank Failure?,” Federal Reserve Bank of New York Liberty Street Economics

summary — uncertain: The summary is faithful, but central comparison terms are unexplained and definitions is empty. TCE and MTM TCE appear without expansion: tangible common equity, and TCE adjusted for estimated losses on loans and securities. 'Both tested horizons' omits that the horizons are eight and twelve quarters before failure. 'Going concern' and 'credit spreads' are also undefined. Smallest repair: expand TCE and MTM TCE, state the horizons, and add tooltips. The title, which says the authors argue 'for Economic Capital', is vague about what they actually argue.

The four measures are our baseline EC measure, R-EC, TCE, and TCE adjusted for estimated losses on loans and securities (MTM TCE).

date — pass: November 6, 2025 matches originalPublished (2025-11-06T12:00Z) and the page dateline. The evidence kind is a publisher page, so no archive disclosure is needed. The page was edited afterward (2026-10-01), apparently to the author note about Plosser. The reading does not use that note, and it uses no later-added passages or hindsight framing.

November 6, 2025 Economic Capital: A Better Measure of Bank Failure?

support — pass: Each claim matches an exact excerpt from the post body, which is plainly the original piece rather than the later-edited author note. The statement that the analysis does not establish operational performance is a reasonable limitation. It does not contradict the authors' 'could be a useful supplement' conclusion.

indicating that Economic Capital could be a useful supplement to existing solvency metrics in monitoring both the health of individual banks and the risks facing the banking system

media — pass: No media is selected and no verified candidates were supplied, so no media identity or relevance issue arises.