Rummaging Through the Fed Archives: When Capital and Liquidity Regulations Were Integrated

Current bank regulations evaluate a bank’s capital and liquidity separately. Digging through the Federal Reserve archives, we found that this has not always been the case.[1]  Federal Reserve Board Form F.R. 363 – Form for Analyzing Bank Capital – from 1956 defines a risk-based capital requirement augmented with a liquidity-sensitive add-on[2].  As described in Luckett (1962), the form was used on an “experimental basis” for at least four years beginning in 1956 to evaluate a bank’s capital position, with the assessment influenced by the bank’s liquidity position.[3]  In this note, we describe how the form incorporated liquidity risk into a capital assessment, as well as several other interesting characteristics of the measure.  We then investigate how banks would currently perform under the capital-liquidity measure. We find that, in aggregate, larger banks, GSIBs, banks subject to capital stress tests and banks subject to liquidity requirements all have more capital than required by the form.  The remaining smaller banks do not. Results are driven by the relatively higher amount of cash assets held by larger banks, possibly reflecting the incentives created by liquidity requirements.  We conclude by reflecting on the potential merits of integrating the approach taken in the metric into today’s regulatory framework.

Capital regulations are designed to ensure that the value of a bank’s assets exceed its liabilities by enough so that the bank is very unlikely to become insolvent over some period.  Liquidity regulations are designed to ensure that a bank will be able to meet scheduled payments, deposit withdrawals and draws on lines of credit over some period.  Conceptually, a bank’s capital and liquidity needs are related.  The forced liquidation of illiquid assets can result in a reduction in the value of a bank’s assets and capital, and a liquid bank is better able to withstand transitory negative shocks.  Moreover, a bank whose assets are worth significantly more than its liabilities should be able to borrow against those assets to meet its obligations if it has enough time to raise the funds.

There have occasionally been calls for capital and liquidity assessment to be more integrated.  For example, in Daniel Tarullo’s final speech as Fed Governor, he expressed a hope that stress tests would become more macroprudential by taking into account second-round effects from banks selling assets at fire-sale prices.  In The End of Alchemy, Mervyn King called for banks to keep enough collateral pledged to the central bank to cover all liabilities, noting that such a requirement would make central bank collateral haircuts the de facto capital requirements.[4] 

Current requirements do combine capital and liquidity risks somewhat in at least one instance.  In the United States, the Global Systemically Important Bank (GSIB) capital surcharge depends in part on

banks’ short-term wholesale funding (STWF).  The preamble to the GSIB rule states that STWF is included because short-term borrowing leaves a bank vulnerable to runs.

To meet its borrowing obligations, the borrowing firm may be required to rapidly sell less liquid assets, which it may be able to do only at fire sale prices that deplete the seller’s capital and drive down asset prices across the market.

The Basel Committee on Banking Supervision has commissioned investigations into the potential value of integrating capital and liquidity assessments of a bank’s condition.  In “Making supervisory stress tests more macroprudential:  Considering liquidity and solvency interactions and systemic risk,” a BCBS working group concluded that “integrated liquidity and solvency stress tests . . . are desirable, as liquidity and solvency interactions can be material.”  In “Literature review on integration of regulatory capital and liquidity instruments,” another BCBS working group identified four channels of interaction between liquidity and capital requirements: (1) Both types of requirements provide incentives for banks to hold higher-quality assets; (2) liquidity requirements may reduce the need for banks to sell assets at fire-sale prices which could threaten a bank’s solvency; (3) both types of requirements may impact bank profits and thereby their ability to replenish capital through retained earnings; and (4) both types of requirements lead to the “shoring up of buffers” that protect the bank from failure.  Owing to these channels, the working group concluded that “these two types of requirements have elements of substitutability but also complementarity.”  The group also observed that “the literature suggests that not taking into account liquidity and interbank channels in solvency stress tests could understate total losses by as much as 25%.”

While capital and liquidity assessments are not currently combined, they have been in the past.  In 1956, the Board of Governors gave examiners a liquidity-sensitive metric for assessing bank capital.  The F.R. 363 “Form for Analyzing Bank Capital” defines a risk-based capital requirement that estimates the amount of capital a bank would need to remain solvent under the assumption that a forced liquidation of some of the bank’s assets becomes necessary to meet funding needs.  The form was included as an appendix to a 1968 paper on discount policy and bank supervision prepared by Benjamin Stackhouse of the Bank Examinations Department of the Federal Reserve Bank of New York.[5]

Luckett (1962) quotes a letter from a Vice President of the Federal Reserve Bank of Chicago that describes how the form was used:

In a letter to the author, Mr. Hugh J. Helmer, vice-president of the Federal Reserve Bank of Chicago, emphasizes that the “Form for Analyzing Bank Capital” is subject to substantial modification in any particular instance. The “normal range” of banks considered to be adequately capitalized is from 80 to 120 per cent of their capital requirements (with shadings near the extremes) as indicated by the Form. Nevertheless, a bank with too low a percentage may be put under considerable pressure to sell additional capital stock, retain earnings, or shift its assets. In this connection, see the report on the Continental Bank and Trust Company in the Federal Reserve Bulletin, August, 1960, pp. 859-67, where the bank had, in the opinion of the Board, only about 50-60 per cent of its capital needs.

Use of the form is discussed further in the minutes of one of the Board meetings – on June 6, 1960 –  convened to determine whether Continental Bank was adequately capitalized.[6]  The Director of the Board’s Division of Examinations explained that the bank’s capital situation was evaluated using a number of different measures, but “…explained why it was felt that the Form for Analyzing Bank Capital [the F.R. 363] had certain advantages as a screening device not inherent in other screening devices.” (p.28) indicating that the form was used and taken seriously by Board examiners.

Description Of The Combined Capital And Liquidity Requirement (F.R. 363)

The F.R. 363 established a capital requirement based on asset risk and added an additional requirement based on assumed liquidation markdowns of assets needed to cover potential liquidity needs under stress.  The form and explanatory notes are included in Appendix 1, and an example filled-out form as Appendix 2.


The component of the capital requirement calculated by the form that is based on asset risk (as opposed to liquidity risk) is similar to current risk-weighted capital requirements.  The capital requirement for a normal asset, such as a business or household loan, is 10 percent.  The requirements for lower-risk assets are lower. In a few cases, the requirement is 100 percent, meaning the asset must be funded entirely with equity.

Unlike current capital requirements, the requirements are sensitive to interest rate risk.  For example, banks are required to fund themselves with capital equal to 0.5 percent of Treasury securities with maturity of less than 1 year, 4 percent for Treasury securities with maturities between 1 and 10 years, and 6 percent for Treasury securities with maturities of more than 10 years.  Moreover, capital equal to only 0.5 percent of commercial paper (CP) is required, likely because CP’s short maturity reduces both interest rate and credit risk.

The capital requirement for some assets is greater than 10 percent.  For premises, other real estate owned equities, and assets classified as “loss,” the requirement is 100 percent.  The requirements for assets classified as “substandard” or “doubtful” are 20 percent and 50 percent, respectively.  The high capital requirements associated with classified assets are offset by the inclusion of the “Reserve for Contingency” and “Loan Valuation Reserve,” which are similar to the current Allowance for Loan and Lease Losses (ALLL), in equity.  Under current accounting, the ALLL is deducted from assets, reducing both assets and equity.  If a bank were to set its loss reserves equal to 100 percent of assets classified as loss, 50 percent of assets classified as doubtful, and 20 percent of assets classified as substandard, the two approaches (add the reserve to equity and don’t subtract from assets, or subtract from assets and therefore exclude from equity) would be the same.

These capital requirements can be converted into risk weights if we assume that the default risk weight on loans and securities not otherwise listed is 100 percent, just like current risk weights.  Because the capital requirement on those assets is 10 percent, the risk weights on other asset categories is the capital requirement divided by 10 percent (that is, multiplied by 10).  For example, the risk weights on short-, intermediate- and long-term Treasury securities are 5, 40, and 60 percent, respectively, well above the current weight of zero for each category.  By contrast, the weight on commercial paper is 5 percent—the same as Treasury bills—compared with its current weight of 100 percent. 


In addition to risk-based capital requirements for credit and interest-rate risk, the F.R. 363 form calculates an additional capital requirement to cover losses associated with liquidating assets to meet liquidity needs.  To do so, the form calculates outflows from different liabilities that it assumes are met by liquidating assets, starting with the most liquid.  The liquidation markdowns are higher for less liquid assets. 

Compared with the two current international liquidity metrics, the balance sheet focus of the calculation more closely resembles the Net Stable Funding Ratio (NSFR) than the Liquidity Coverage Ratio (LCR).  The magnitude of the outflows also seems more consistent with the NSFR’s longer horizon.

The outflow rates equal 47 percent of the demand deposits of individuals, partnerships, or corporations (IPC); 36 percent of time deposits of IPCs; 100 percent of deposits of banks; 100 percent of other deposits; and 100 percent of “borrowings.”  As explained in the notes to the form, the 47-percent outflow rate on IPC demand deposits represents an assumption that the deposits decline by one-third, plus an additional outflow equal to 20 percent of the remaining two-thirds.  Similarly, the 36-percent outflow rate on deposits equals an assumption that the deposits decline by 20 percent, plus an additional 20 percent of the remaining 80 percent.  The notes explain that the extra 20 percent in both cases “is to help the bank continue as a going concern even after suffering substantial deposit shrinkage.”  The calculation, in effect, assumes that an amount equal to 20 percent of remaining IPC deposits of the bank’s most liquid assets are unavailable to finance outflows.[7]   One explanation for this assumption could be that the reserve requirements on demand deposits was roughly 20 percent then. However, this is not completely satisfactory, because the reserve requirement on time deposits at that time was about 5 percent.[8] For comparison, the two standardized international liquidity requirements, the 30-day LCR and the 1-year NSFR, assume 3 percent and 5 percent of insured demand deposits leave the bank, respectively.

The form calculates the liquidity available from assets to meet outflows using haircuts that increase as asset liquidity declines.  The entire value of Primary and Secondary Reserve assets, which include highly liquid assets such as cash and Treasury bills, less capital requirements for those assets, is assumed to be available.  Ninety percent of Minimum Risk Assets, which include medium-term Treasury securities and short-term muni assets, is assumed to be available.  And 85 percent of Intermediate assets, which include longer-term Treasuries, is assumed to be available.  Additional liquidity needs are met by liquidating Portfolio Assets, which equal all other loans and securities.   As explained in the last line of the Notes to the form, the extra capital required to cover losses on the liquidated assets assumes a loss of 6, 9, and 15 percent on Minimum Risk, Intermediate, and Portfolio assets, respectively.  No extra capital is required to cover losses on Primary and Reserve assets because “the regular capital specified for these assets assumes forced liquidation.” 

In short, the form is designed to assess whether a bank can withstand a massive run while remaining sufficiently capitalized and still having a healthy reserve of liquid assets.  In the remainder of this note, we evaluate whether today’s banks could fulfill such a requirement.

Mapping from Current Call Report Items to F.R. 363

As described in detail in Appendix 3, to apply the liquidity and capital test defined in F.R. 363, we need to map current Call Report (bank quarterly balance sheet and income statement) items to the items in the form, and then perform the calculation set out in the F.R. 363.  As noted, the form first defines a baseline capital requirement that depends on the riskiness of bank’s assets.  It then defines a stress funding outflow and determines what assets the bank would have to liquidate to meet that outflow.  Finally, it calculates extra capital required to cover the reduction in the value of assets that must be sold at fire-sale prices to meet the outflow.  All items are drawn from the 2019Q4 Call Reports to avoid the effects of the COVID-19 pandemic.

Baseline Capital Requirement

As a baseline, as discussed above, the F.R. 363 requires that a bank fund each asset with 10 percent capital, but the requirement is reduced for some assets and increased for others.  The category with the lowest risk weights is “Primary and Secondary Reserve.”  Within that category, banks are not required to fund “cash assets,” in which we include deposits at other banks and deposits at the Fed, with any equity.  One-half of 1 percent of very short-term financial assets, including Treasury bills out to 1 year and commercial paper, must be funded with equity.  In that category, we include reverse repos, fed funds sold and an estimate of Treasury securities with maturities of 1 year or less.  The estimate is derived by multiplying the share of the bank’s Treasury securities holdings by the fraction of the bank’s holdings of debt securities with maturities less than 1 year. We use this approach to determine the maturity breakdown of all Treasury securities.  The bank is required to fund 4 percent of slightly longer-term securities with equity, including Treasury securities with 1- and 5-year maturities and investment-grade corporate bonds with maturities of up to 3 years.  We assume that half of each bank’s CMBS, ABS and other corporate bonds have maturities of up to 3 years.

The next category of low-risk assets is “Minimum Risk Assets,” all of which are required to be funded with 4-percent equity.  The section includes Treasury securities with maturities between 5 and 10 years, short-term loans to municipalities, and other assets with no current equivalent.  We include a portion of Treasury securities, all agency-guaranteed MBS (which typically have weighted-average maturities of well less than 10 years), and all muni loans and muni debt.

The bank is required to fund 6 percent of “Intermediate assets” with equity.  Intermediate assets include Treasuries with maturities of more than 10 years, as well as FHA and VA loans.  We include a fraction of Treasury securities calculated as described above. 

On the riskier end of the asset spectrum, the bank is required to fund premises, furniture and fixtures, other real estate owned, stocks and defaulted securities completely with equity.  All these assets have a modern-day equivalent on the Call Report, which we use.

And finally, the form requires hefty capital for what then and now are called “classified assets,” or troubled assets judged “substandard,” “doubtful” and “loss.”  The Call Report does not include classified assets.  However, banks do now maintain an allowance for loan and lease losses that is deducted from assets and therefore from capital.  By contrast, in the F.R. 363, the “loan valuation reserve,” which appears to be similar, is added to capital.  We follow current practice and use loans net of the loss allowance and don’t include the loss allowance in capital. 

Liquidity Shock, Liability Outflows

Less judgment is required to map current liability items into those used on the F.R. 363.  Demand deposits and time deposits of individuals, partnerships and corporations are available on the current Call Report, as are deposits of banks (U.S. and foreign, at domestic and foreign offices).  We define “other deposits” simply by subtracting the categorized deposits from total deposits.  We include in “borrowings” fed funds purchased, repo and “other borrowed money” with remaining maturity of 1 year or less.[9]  As noted above, the total assumed outflow is 47 percent of demand deposits; 36 percent of time deposits; and 100 percent of bank deposits, other deposits, and other borrowings.

Other Items

Two other items are required to fill in the form: trust income and equity.  Each bank is required to hold capital equal to 3 times gross earnings of the trust department.  We use “fiduciary income,” which includes trust department income. 

The F.R. 363 defines “Actual Capital, Etc.” as

(Sum of Cap. Stock, Surplus, Undiv. Profits, Res. For Conting., Loan Valuation Res., Net unapplied Sec. Valuation Res., Unallocated Charge-offs, and any comparable items) (Exclude Depreciation and Amortization Reserves)   

We use “total equity capital” from the Call Report, which includes preferred stock, common stock, surplus, and retained earnings.  As noted, we did not include the allowance for loan and lease losses, because bank assets are net of the allowance.  We did not make the other adjustments simply because we do not know what they mean.


We use Call Report data as of 2019Q4, and the mapping described above, to apply the F.R. 363 to current U.S. banks.  Our sample includes 4,625 banks.  We use the largest commercial bank subsidiary for each bank holding company.  We look separately at four different groups. Group 1 includes the 8 Global Systemically Important Banks (GSIBS). Our second group – CCAR – includes 16 banks subject to the Fed’s annual capital stress tests. The third group – ILST – includes all banks that are required to conduct regular internal liquidity stress tests and subject to advanced liquidity requirements; roughly all banks with more than $100 billion in assets.[10] Lastly, we include all the other banks in our sample. 

Table 1: Ratio of Bank Requirements to Assets

As shown in Table 1, each category of banks except “Other” has more capital than would be required by the F.R. 363.  Largely because larger banks have a greater percentage of their portfolios in cash – primarily reserve balances – their capital requirements and the liquidity add-ons are lower than for other banks.  Comparing banks currently subject to liquidity requirements to the remaining banks (Column ILST vs. Column OTHER above), their capital requirement is 1.1 percentage points lower, and their liquidity add on – the fire-sale losses from liquefying illiquid assets – is about half the size.  The latter result suggests liquidity regulations and examinations are accomplishing their objective of ensuring that banks have sufficient liquidity to cover projected net funding outflows under stress.

Table 2 provides additional details on the balance sheets of the ILST banks and the other banks.  As can be seen, the two sets of banks each have liability outflows equal to about one-third of assets.  However, the ILST banks have a higher percentage of their balance sheet invested in cash, reverse repos, and Treasury securities and a smaller percent invested in loans.  As a result, the ILST banks are able to satisfy their liquidity needs to a greater extent using liquid assets and therefore, when applying the logic behind the F.R. 363 form described in this note, have a markedly lower assumed markdown from raising funds using illiquid assets. 

Exhibit 1 showing differences in bank asset distribution
exhibit 2 showing asset composition that drives changes in capital and liquidity requirements
Table 2: Additional Information on Banks Subject to Liquidity Requirements and Other Banks


The combined capital and liquidity assessment defined by F.R. 363 is worth investigating further as an approach for conducting a similar joint assessment of banks today.  The logic is sensible: “How much capital would a bank need to withstand a shock that included a significant loss of funding and attendant losses from forced sales of assets?”  Some elements of the form reflect a different but reasonable view of risk—longer-term Treasury securities really are riskier than shorter-term Treasury securities, for example.  Some aspects are hard to understand: what kind of shock would cause a bank to lose half of its retail deposits?  Some aspects are just out of date; securities are now much more liquid than 70 years ago. 

Even so, the assessment finds that in aggregate, larger banks today have approximately the right amount of capital under the particular stress scenario defined in the 1956 F.R. 363 while smaller banks do not fare as well. The difference is driven by the high amount of cash assets held by larger banks which are subject to current liquidity requirements.  

This approach could be incorporated into bank stress tests.  In addition to assessing the losses from a sharp recession, banks could also estimate the losses resulting from a significant loss of funding.  To prevent the change from being an unintended tightening of capital requirements, the macroeconomic shock could be reduced.  The information gathered about tested banks’ funding plans would not only foster a more nuanced measurement of each bank’s resilience, but it would also allow the Fed to measure the extent to which banks are all planning to tap the same funding sources under stress.

Appendix 1: F.R. 363 Form from Reappraisal of the Federal Reserve Discount Mechanism, Volume 3

Appendix 1: F.R. 363 Form from Reappraisal of the Federal Reserve Discount Mechanism, Volume 3
Appendix 1: F.R. 363 Form from Reappraisal of the Federal Reserve Discount Mechanism, Volume 3

Appendix 2: Example of Filled-in F.R. 363 Form from Reappraisal of the Federal Reserve Discount Mechanism, Volume 3

Appendix 2: Example of Filled-in F.R. 363 Form from Reappraisal of the Federal Reserve Discount Mechanism, Volume 3
Appendix 2: Example of Filled-in F.R. 363 Form from Reappraisal of the Federal Reserve Discount Mechanism, Volume 3

Appendix 3: Mapping from 1956 F.R. 363 to 2019Q4 Call Report Items

Appendix 3: Mapping from 1956 F.R. 363 to 2019Q4 Call Report Items
Appendix 3: Mapping from 1956 F.R. 363 to 2019Q4 Call Report Items
Appendix 3: Mapping from 1956 F.R. 363 to 2019Q4 Call Report Items

Research assistance provided by Jose Maria U. Tapia

[1] See Reappraisal of the Federal Reserve Discount Mechanism, Volume 3, 1972, pp. 159–160, 166–167.

[2] “Martin and Younger (2020) note the existence of a 1956 form that combines a capital and liquidity assessment in “War Finance and Bank Leverage: Lessons from History.”

[3] Duckett, Dudley G., 1956, Compensatory Cyclical Bank Asset Adjustments, The Journal of Finance, March 1962, Vol. 17, No. 1 (Mar. 1962), pp. 53-62.

[4] King, Mervyn (2016), The End of Alchemy: Money, Banking, and the Future of the Global Economy, W.W. Norton, New York, chapter 7.

[5] Stackhouse, Benjamin, Fundamental Reappraisal of the Discount Mechanism: Discount Policy and Bank Supervision, Board of Governors of the Federal Reserve System, Washington, D.C., 1968.

[6] Minutes of the Board of Governors of the Federal Reserve System on July 6, 1960.

[7] There may be, however, a “turtles all the way down” problem with the reasoning.  Suppose, for example, that it was judged proper that a bank maintain 25 percent of its assets as HQLA to cover liquidity contingencies.  If it is also required to hold 25 percent of its assets as HQLA after experiencing a cash outflow equal to 25 percent of its assets, then it should be required to hold 44 percent of its assets as HQLA now.  But presumably, it should also be required to have 44 percent of its assets as HQLA after experiencing the 25-percent outflow.  Therefore, it should hold 77 percent of its assets as HQLA now.  And so on.  The requirement converges with banks required to hold all of their assets as HQLA.

[8] For central reserve city banks, the maximum reserve requirement on demand deposits of IPCs was 26 percent, and the minimum was 13 percent.  For reserve city banks, the maximum and minimum were 20 and 10 percent.  For country banks, the maximum and minimum were 7 and 14 percent.  For time deposits of IPCs, the maximum and minimum reserve requirements for all banks were 6 and 3 percent.  See Federal Reserve Bulletin, March 1956, p. 238.

[9] It may be more appropriate to include repo net of securities provided as collateral, since the collateral would be returned if the repo was not rolled over.

[10]  “ILST” banks are all banks in category I-IV under the Federal’s Tailoring Rule Requirements for Domestic and Foreign Banking Organizations.