Three of four key measures tracking U.S. banking system vulnerability have risen over the past year, according to an annual update published November 12 by researchers at the Federal Reserve Bank of New York. The analysis, which uses data through the second quarter of 2026, shows that while vulnerability levels remain well below those seen before the 2008–09 financial crisis, some metrics have climbed higher than the low points reached between 2015 and 2020. The report evaluates banking system fragility across four dimensions: capital adequacy, fire-sale risk, liquidity stress, and run vulnerability.
Under a stress scenario replicating 2007–09 financial crisis conditions, the capital gap—the total amount banks would need to meet a 10 percent Tier 1 common equity threshold—stands at $16.9 billion, up from $1.9 billion in the second quarter of 2025. A second scenario mirroring the 2022 interest rate surge produces a capital gap of $151.1 billion, barely changed from $161.3 billion a year earlier. The fire-sale vulnerability index, which gauges bank exposure to system-wide asset sell-offs, has edged higher compared to last year's update and sits on an unsteady uptrend since late 2024, though it remains moderate by historical standards. The liquidity stress ratio—measuring the mismatch between funding outflows and asset liquidity—now stands at a level not seen since 2014, having climbed steadily since early 2022. The run vulnerability index, which captures banks' susceptibility to both liquidity and solvency shocks, has also increased from the previous annual assessment and remains elevated compared to 2015–2022 levels.
The report attributes the recent shifts in capital vulnerability to declining bank capital ratios, which under the 2022 scenario have been "further compounded by the generalized increase in rates since March 2026." The authors note early signs of a trend reversal: while capital levels had been improving since 2023 as actual bank capital rose and unrealized losses on securities decreased, "since the last update in 2025:Q2, there are early signs of a trend reversal, with capital levels deteriorating modestly." According to the researchers, the sharp rise in the liquidity stress ratio since early 2022 has been driven by falling liquid assets combined with rising unstable funding and off-balance-sheet exposures.
The upward drift in vulnerability reflects a confluence of balance sheet pressures that feed on one another. When interest rates climb, as they have since March 2026, banks holding securities to maturity face unrealized losses that erode their capital cushions even if those losses don't immediately hit income statements. Lower capital ratios leave banks more leveraged, which in turn amplifies their sensitivity to fire-sale dynamics—when one institution dumps assets to meet regulatory thresholds, the price impact spills over to others holding similar portfolios. Meanwhile, a mismatch between liquid assets and unstable funding makes banks more fragile during periods when depositors or short-term creditors pull money quickly. The decomposition charts in the report show that leverage measured at fair value has been the main driver of fire-sale vulnerability since 2022, while higher illiquid assets, unstable funding, and stress leverage have all contributed to run vulnerability's recent climb.
The researchers emphasize that vulnerability measures, though rising, haven't approached the extremes of the pre-2008 era. The liquidity stress ratio sits slightly above half its 2007 peak, and run vulnerability remains moderate by historical comparison. Still, the authors conclude with a clear signal: "Overall, three of our four measures show increasing trends in vulnerabilities of the overall banking system." For policymakers and bank executives, the message is that the system's defenses—built up painstakingly after the last crisis and fortified during the low-rate calm of the late 2010s—are beginning to thin again as rates stay elevated and balance sheets adjust.