• Capital is like a cushion: more losses you can absorb before failing.
• Liquidity is like your cash-on-hand for emergencies.
• Stress tests are fire drills: can the bank handle bad scenarios?

• CFPB (consumer financial protection)
• State regulators (state-chartered banks, non-banks)

The following illustrates the U.S. standardized credit-risk approach. The treatment depends on the exposure and applicable rules; these are not universal weights for all banks or countries.

Mortgage loan ≠ mortgage-backed security (MBS). The 50% you may remember concerns qualifying mortgage loans. MBS is a security backed by a pool of mortgages; its guarantee and structure affect its risk weight.

References: Federal Reserve: general risk weights · FDIC: mortgage loans versus GSE-guaranteed MBS.

No. RWA is a measure of risk exposure, not a score to maximize. Compare banks of the same size with the same capital:

Bank B supports more credit risk with the same capital. Bank A has more capital per dollar of RWA. This comparison does not capture every risk: Treasury holdings can carry interest-rate risk, and either bank can face liquidity problems.

Remember: More capital strengthens the cushion. More RWA increases the risk exposure that needs that cushion. A larger bank can have larger RWA simply because it is larger, so compare ratios and the underlying risks.

• Systemic risk: Could this problem spread?
• Stress tests: Could the bank absorb losses in a severe scenario?
• Volcker Rule: Is this trading allowed under the rule?
• Resolution: How could the firm fail in an orderly way?
• Consumer: Are customers being treated lawfully and fairly?
• Derivatives: What if the counterparty cannot pay?

• Treasury: FSOC
• Federal Reserve: stress testing
• Federal Reserve: Volcker Rule and permitted activities
• FDIC: resolution authority
• CFPB: origins and purpose
• CFTC: swaps reform

A local bank that mainly accepts deposits and makes ordinary loans differs from a global banking group with complex trading and international operations. Applying every large-bank requirement to both can create unnecessary costs for the smaller firm.

The trade-off: lighter requirements can reduce compliance costs, but requirements still need to capture real risk. A smaller bank can still have concentrated customers, long-duration bonds, and rapidly moving uninsured deposits.

Prudential means aimed at financial safety. Complexity means how difficult the business is to understand, supervise, or resolve if it fails.

• Category I: U.S. global systemically important banks (GSIBs). Their size and interconnectedness justify the strongest safeguards in this framework.
• Category II: Other very large or internationally active firms with significant risk indicators.
• Category III: Other large firms with specified size or risk characteristics, such as certain funding or nonbank exposures.
• Category IV: Other covered large firms with fewer of those risk indicators; requirements are generally less demanding than in higher categories.
• Smaller banks: Generally outside these large-bank categories, but still subject to applicable capital rules, supervision, and other requirements.

These are regulatory categories, not grades of management quality. Detailed thresholds and obligations depend on the applicable rules; do not classify a bank using its name alone.

Interest-rate risk: rising market yields generally reduce existing fixed-rate bond prices. Longer-duration bonds are more sensitive.

Teaching example: a bond portfolio with duration near 5 years could lose roughly 10% of market value if yields rise 2 percentage points, using the simple duration approximation. The actual change depends on the bonds and other factors.

Uninsured-deposit concentration: many balances above insurance limits, especially from customers in the same industry, can leave together. Digital banking makes transfers quick.

If withdrawals force sales of depreciated securities, the bank can realize losses while trying to obtain cash. Capital and liquidity pressures then interact.

Pre-positioning collateral means preparing eligible assets, documents, systems, and arrangements so assets can support borrowing when needed. Possessing bonds does not by itself guarantee immediate access to cash.

Liquidity in resolution means funding critical functions while a failed firm is being dealt with. Communication means giving accurate, timely information to customers and other parties.

The Federal Reserve’s 2023 SVB review identified management and supervisory weaknesses as well as insufficiently workable liquidity plans. There was more than one cause.

Basel III endgame is a common label for efforts to implement the final Basel III capital reforms. Capital measurement and the scope of requirements are central issues.

Long-term debt is funding that does not mature immediately and, under applicable resolution arrangements, can provide loss-absorbing capacity. It is not the same as CET1 equity or a cash reserve.

After 2023, agencies proposed capital and long-term-debt changes. A proposal is not a final rule. Its scope, timing, and content can change. This section explains policy ideas rather than presenting those earlier proposals as today’s binding requirements.

A payment stablecoin is a digital asset designed for payment or settlement and a stable monetary value. Think of a token intended to be redeemable for $1.

The issuer creates the token and has the redemption obligation. PPSI means permitted payment stablecoin issuer: an issuer approved under the statutory framework. Depending on the issuer, the framework involves federal or qualifying state oversight.

Approval is not a guarantee against loss. A token holder still needs to understand the issuer, redemption arrangements, and operational risks.

Reserves are assets backing the outstanding stablecoins. The law requires at least one-to-one backing with specified eligible assets, including cash and short-term Treasuries. “HQLA” in a bank liquidity lesson is not a substitute for the stablecoin law’s particular asset list.

Teaching example: for 100 one-dollar tokens outstanding, the issuer needs at least $100 of eligible reserves. If a holder redeems 10 tokens for $10, outstanding tokens and reserve assets decrease by $10 in the simplified example.

Redemption means exchanging the token for the promised money. Par value is that stated amount—$1 in this example. Reserve restrictions limit how backing assets can be used.

Disclosure provides information about reserves and redemption policies. An attestation checks specified information; an audit has a broader defined scope. They are not interchangeable guarantees of safety.

Customers should understand how redemption works and what risks remain. A payment stablecoin is not automatically an FDIC-insured bank deposit. Reserve backing is different from deposit insurance.

AML/CFT means anti-money laundering and countering the financing of terrorism. It concerns preventing illicit use and meeting applicable compliance duties.

Cybersecurity protects systems and access. Business continuity concerns keeping essential services working during disruption. Wind-down means ending operations in an orderly way, including addressing outstanding redemption obligations.

Supervisors oversee covered issuers and can use applicable corrective or enforcement powers. Detailed implementation standards must be distinguished from the law itself and from agency proposals.

• July 18, 2025: enactment.
• General effective-date rule: the earlier of January 18, 2027 (18 months after enactment) or 120 days after the primary federal regulators issue final implementing regulations.
• July 18, 2028: a separate restriction generally applies to digital asset service providers offering or selling payment stablecoins to U.S. persons unless the issuers qualify under the framework, subject to statutory exceptions.

Do not treat July 2028 as the law’s general start date. Check final rules and the relevant provision when determining an actual obligation.

A bank funds loans and other assets with deposits and other funding. A payment stablecoin issuer must maintain specified reserve backing for its tokens. Reserve backing, issuer capital, and deposit insurance are different safeguards.

Discussion: compliance costs may rise at first. Clearer rules could support trust and payment use over time, but these are possible outcomes, not promises. Faster transfers can improve payments and can also accelerate redemptions.

Ask: Who owes me the money? What backs that promise? How can I redeem? What protection applies if the firm fails?

1. Start with $60 of CET1.
2. Subtract $25 of modeled losses: $35 remains.
3. Subtract $5 of planned shareholder distributions: $30 remains.
4. Divide by $600 RWA: $30 ÷ $600 × 100 = 5%.

In this toy, stopping the $5 payout raises the result to $35 ÷ $600 ≈ 5.8%. That preserves capital; it does not reverse the losses. Real tests also account for earnings, balance-sheet changes, multiple ratios, and applicable buffers.

The toy’s 4.5% floor is not a full regulatory pass/fail test. Passing this one comparison does not prove the bank meets all requirements or has enough cash for a run.

Critical operations: services whose interruption could cause serious disruption, such as important payment functions. Separability: the ability to sell, transfer, or wind down parts of a group without breaking essential functions.

Example: if several subsidiaries use one computer system, the plan needs to explain how that system remains available while the group is resolved. Identifying the problem before failure gives the firm time to simplify or prepare.

A living will is prepared before failure. It is a plan for orderly resolution, not a promise of a bailout.

$250,000 per depositor, per FDIC-insured bank, per ownership category. Checking, savings, and CDs in the same category at the same bank are generally added together—not insured separately just because the account numbers differ.

Example: one person has $180,000 in checking and $100,000 in savings, both single-owner accounts at the same bank. The combined $280,000 generally has $250,000 insured and $30,000 uninsured, assuming no other deposits or accrued interest.

Accounts at different branches of the same insured bank still count together. Qualifying joint, certain retirement, and trust accounts follow category-specific rules. Use FDIC’s coverage calculator for the actual ownership arrangements.

Eligible deposit products include checking accounts, savings accounts, and certificates of deposit (CDs). Insurance generally includes principal and accrued interest up to the applicable limit.

Stocks, bonds, mutual funds, crypto assets, and payment stablecoins do not become insured deposits merely because a bank sells or is connected to them. A money-market deposit account differs from a money-market mutual fund.

Uninsured funds are not automatically all lost, but their recovery can depend on the failed bank’s assets and resolution. Do not assume every failure will receive extraordinary protection.

A company with a large payroll balance may fear losing access to its money or suffering a loss. If many customers think alike and transfer money together, cash needs can jump.

Example: depositors request $20 million, but the bank has only $5 million immediately available. It must obtain $15 million through eligible asset sales, borrowing, or other arrangements. A valuable loan portfolio cannot necessarily be converted to cash instantly.

Insurance helps confidence; liquid assets, usable funding arrangements, and credible communication help meet payments.

1. CET1: keep capital fixed and raise RWA. Explain why the ratio falls.
2. LCR: raise 30-day net outflows with HQLA fixed. Explain the added cash pressure.
3. NSFR: reduce stable funding with the funding requirement fixed. Explain why renewal risk rises.
4. Stress drill: increase losses, then reduce distributions. Explain what happens to remaining CET1.

Change one input at a time. State the direction, then explain the reason in words.

Q1 — A: capital is the cushion against losses; liquidity addresses the timing of payments. Q2 — B: LCR compares eligible liquid assets with modeled stressed net outflows, not mortgage capital. Q3 — A: tailoring adjusts requirements to characteristics such as size and risk; supervision still applies.

Use four short paragraphs: (1) identify your bank type and two risks; (2) explain the rate-rise scenario; (3) explain the withdrawal scenario; (4) propose two fixes and a trade-off for each. Compare your bank type with the Model Bank where useful.

Example reasoning: “A regional bank with more concentrated uninsured deposits could face faster withdrawals than the Model Bank. It could diversify its depositor base, but building those relationships takes time. It could hold more liquid assets, but those assets may earn less than loans.”

This is one illustrative argument, not a complete answer to copy. State assumptions and explain the chain from risk → consequence → fix → trade-off.

Model Bank note: its $600 RWA, $600 ASF, and $560 RSF are assumed teaching inputs. They are not derived automatically from the displayed balance sheet. Cash and HQLA are different concepts; HQLA can include eligible securities, so avoid double-counting them.

Large diversified banks: diversification can spread risk, but complexity, trading exposures, and interconnections create additional challenges. Regional banks: geography, customer industries, and funding concentrations can matter; not all have SVB’s profile.

Credit unions: member ownership does not remove credit or liquidity risk. Federally insured credit unions use NCUA share insurance, not FDIC insurance.

Fintech/neobank: determine whether the firm itself is a licensed bank or uses partner banks. Many fintech firms are not banks. Deposit protection depends on where funds are held and whether insurance conditions are met; an app’s marketing is not enough.

Evaluate the actual balance sheet, funding mix, risk controls, and legal structure. A label alone cannot tell you whether an institution is safe.

• OCI: certain accounting gains/losses recorded outside net income. AOCI is their accumulated balance within equity; regulatory CET1 treatment depends on the rules.
• AFS: available-for-sale debt securities generally show fair-value changes through OCI. HTM: held-to-maturity securities generally use amortized cost. An HTM label does not remove economic interest-rate risk.
• Duration: a measure of bond-price sensitivity to yields. IRR means interest-rate risk in this banking lesson; elsewhere in finance it often means internal rate of return.
• Wholesale funding: borrowing from financial institutions or markets. Short maturities mean it may need frequent renewal.
• TLAC: total loss-absorbing capacity—eligible capital and debt intended to support resolution of covered large banking groups. It is not a cash stockpile.
• CTI: cost-to-income ratio—costs relative to income. Lower can mean greater efficiency, but cost cutting that weakens controls can raise risk.
• NIM: net interest income relative to interest-earning assets. ROA: net profit relative to total assets. ROE: net profit relative to equity. These are profitability measures, not guarantees of safety.
• TCE: tangible common equity, an accounting measure excluding relevant intangible assets; it differs from regulatory CET1.
• Loan-to-deposit ratio: loan balances relative to deposits. Interpret it with other funding sources and liquidity; there is no universal “best” ratio.