Authors: Sergio Correia, Stephan Luck, and Emil Verner
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Staff Reports
Bank Failures: The Roles of Solvency and Liquidity
Number 1181
February 2026
February 2026
JEL classification: G01
Bank failures can stem from runs on otherwise solvent banks or from losses that render banks insolvent, regardless of withdrawals. Disentangling the relative importance of liquidity and solvency in explaining bank failures is central to understanding financial crises and designing effective financial stability policies. This paper reviews evidence on the causes of bank failures. Bank failures—both with and without runs—are almost always related to poor fundamentals. Low recovery rates in failure suggest that most failed banks that experienced runs were likely fundamentally insolvent. Examiners’ postmortem assessments also emphasize the primacy of poor asset quality and solvency problems. Before deposit insurance, runs commonly triggered the failure of insolvent banks. However, runs rarely caused the failure of strong banks, as such runs were typically resolved through other mechanisms, including interbank cooperation, equity injections, public signals of strength, or suspension of convertibility. We discuss the policy implications of these findings and outline directions for future research.
Author Disclosure Statement(s)
Sergio Correia
I declare that I have no relevant or material financial interests that relate to the research described in the paper “Bank Failures: The Roles of Solvency and Liquidity”. I have received no outside financial support, and no third party has a “right to review” of the paper.
Stephan Luck
I declare that I have no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Emil Verner
The author declares that he has no relevant or material financial interests that relate to the research described in this paper.
I declare that I have no relevant or material financial interests that relate to the research described in the paper “Bank Failures: The Roles of Solvency and Liquidity”. I have received no outside financial support, and no third party has a “right to review” of the paper.
Stephan Luck
I declare that I have no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Emil Verner
The author declares that he has no relevant or material financial interests that relate to the research described in this paper.
Suggested Citation:
Correia, Sergio, Stephan Luck, and Emil Verner. 2026. “Bank Failures: The Roles of Solvency and Liquidity.” Federal Reserve Bank of New York Staff Reports, no. 1181, February. https://doi.org/10.59576/sr.1181
Correia, Sergio, Stephan Luck, and Emil Verner. 2026. “Bank Failures: The Roles of Solvency and Liquidity.” Federal Reserve Bank of New York Staff Reports, no. 1181, February. https://doi.org/10.59576/sr.1181
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