Borrower asset loses value
An external loss enters the network only once.
Financial vulnerability · learning guide
Financial contagion
See US banking assets, liabilities and equity to scale, then trace one assumed loss through an explicitly invented network without counting the same loss twice.
US-grounded education and conditional simulations. A current calibrated fragility level for this dimension is not yet estimated on ForeGlass.
United States · observed starting scales, conditional stress paths
One institution’s asset is often another institution’s liability
Losses first reduce an institution’s equity. If they exceed that buffer, creditors can suffer losses in turn. At the macro level, damaged balance sheets can restrict finance for otherwise viable households and firms.
Equity absorbs loss first
Assets = liabilities + equity still reconciles.
Creditor claim is impaired
One group’s liability reduction matches another’s asset write-down.
Finance to the real economy
Less equity can constrain lending, investment and activity; the response needs its own behavioral assumptions.
Country, period and measurement
Banking assets
$18,645.348 billionUS, December 31, 2019
FDIC Q4 2019 Table II-A; all 5,177 insured institutions.Official source ↗Total equity
$2,113.987 billionSame FDIC reporting population and date
Includes minority interests. Equity absorbs losses; it is not a separate pile of spendable cash.Official source ↗Deposits
$14,535.283 billionSame reporting date
Only part of total liabilities. Other borrowings and liabilities remain in the balance sheet.Official source ↗Loans and leases
$10,518.202 billionSame reporting date
Opening loan book for a separately labeled lending-capacity sensitivity.Official source ↗What is observed?
The source cards name a country, period, unit and publication. They establish a historical scale; they do not calibrate every interaction in this example.
What is simulated?
The controls and future paths are declared assumptions. A shock window shows when the assumed disturbance acts. It is not a retrospectively identified US recession, forecast date or probability.
What can you decide?
Compare how the same shock changes with a different buffer, funding condition or policy. Use the result to identify the next evidence to collect, not to infer a current national fragility score.
Interactive macro mechanism · no recession probability
Watch pressure accumulate over time
- Round 0
Observed aggregate sizes; invented institutions and connections. - Round 1
Group A loses external assets; equity absorbs part of the loss. - Rounds 2–6
Unabsorbed loss reaches successive creditors; pending amounts stay visible until allocated. - After settlement
Potential credit contraction is a separate macro sensitivity.
FDIC reported $18,645.348 billion of assets, $14,535.283 billion of deposits and $2,113.987 billion of equity at December 31, 2019. The six groups and their $1087.6 billion links are invented. One external loss of $1243.0 billion is finally absorbed as $1243.0 billion of group equity and $0.0 billion by outside creditors. Repeated internal claim write-downs of $1615.1 billion are transmission entries, not extra external losses.
Who owes whom — six invented groups
After settlement; USD billion. Each assets bar has the same scale. Liability and equity segments partition that group’s assets. Arrows point from borrower to creditor; exposure is an opening claim, transmitted loss is its write-down.
Group A
Assets 1,865
Liabilities 1,865
Equity 0
Own equity loss 352.3
→ B
Claim 1,088
Loss passed 890.7
Claim 1,088
Loss passed 890.7
Group B
Assets 2,217
Liabilities 2,217
Equity 0
Own equity loss 352.3
→ C
Claim 1,088
Loss passed 538.4
Claim 1,088
Loss passed 538.4
Group C
Assets 2,569
Liabilities 2,569
Equity 0
Own equity loss 352.3
→ D
Claim 1,088
Loss passed 186
Claim 1,088
Loss passed 186
Group D
Assets 2,922
Liabilities 2,755
Equity 166.3
Own equity loss 186
→ E
Claim 1,088
Loss passed 0
Claim 1,088
Loss passed 0
Group E
Assets 3,108
Liabilities 2,755
Equity 352.3
Own equity loss 0
→ F
Claim 1,088
Loss passed 0
Claim 1,088
Loss passed 0
Group F
Assets 3,108
Liabilities 2,755
Equity 352.3
Own equity loss 0
End of internal chain
Observed FDIC banking scale at December 31, 2019
USD billion; assets = liabilities + equity · bars share one scale within this panel
Invented network after all six rounds
USD billion; aggregate balance sheets include internal claims · bars share one scale within this panel
Who absorbs the original external loss?
USD billion; disjoint final allocations · bars share one scale within this panel
Separate lending sensitivity; not applied to the balances above
USD billion · bars share one scale within this panel
Track one original loss through six settlement rounds
USD billion; allocations, not additional losses · conditional path
Shaded: One assumed external-asset loss at group A; later rounds transmit it.
Original external-asset lossAbsorbed by group equity so farAllocated to outside creditors so farStill to be allocated at the next group
Read values as a table
| Scenario period | Original external-asset loss (USD billion; allocations, not additional losses) | Absorbed by group equity so far (USD billion; allocations, not additional losses) | Allocated to outside creditors so far (USD billion; allocations, not additional losses) | Still to be allocated at the next group (USD billion; allocations, not additional losses) |
|---|---|---|---|---|
| Round0 | 0 | 0 | 0 | 0 |
| Round1 | 1,243 | 352.3 | 0 | 890.7 |
| Round2 | 1,243 | 704.7 | 0 | 538.4 |
| Round3 | 1,243 | 1,057 | 0 | 186 |
| Round4 | 1,243 | 1,243 | 0 | 0 |
| Round5 | 1,243 | 1,243 | 0 | 0 |
| Round6 | 1,243 | 1,243 | 0 | 0 |
Equity left after each completed settlement
USD billion; pending next-group loss shown separately above · conditional path
Shaded: One assumed external-asset loss at group A; later rounds transmit it.
Equity after completed rounds
Read values as a table
| Scenario period | Equity after completed rounds (USD billion; pending next-group loss shown separately above) |
|---|---|
| Round0 | 2,114 |
| Round1 | 1,762 |
| Round2 | 1,409 |
| Round3 | 1,057 |
| Round4 | 871 |
| Round5 | 871 |
| Round6 | 871 |
Equations, assumptions and accounting checks
- The aggregate starting balance sheet is observed FDIC Q4 2019 data for all insured institutions, in nominal U.S. dollars. Liabilities are assets minus equity. Deposits are only part of liabilities; equity is not a stock of spendable cash.
- The model divides assets, liabilities and equity equally across six invented groups. A owes B, B owes C, C owes D, D owes E, and E owes F. Each chosen internal claim is embedded in, not added to, the starting assets and liabilities. All other positions are with outside parties. FDIC aggregates do not identify this network. Network node balances are after settlement; edge values show the original claim, with the transmitted write-down stated separately.
- Only A suffers the initial external-asset loss. Each group absorbs incoming loss with equity, then writes down its liability to the next group, then allocates any remainder to outside creditors. This assumed creditor priority is not actual U.S. resolution or deposit-insurance law.
- Round0 uses the December 2019 aggregate scale. Round1 to Round6 settle invented groups A to F in order; these are accounting steps, not calendar time. A transmitted loss remains in the pending-allocation line until the next group settles; the intermediate remaining-equity line has not yet allocated that pending loss. Final balances reconcile after Round6.
- Internal asset write-downs match internal liability reductions. Adding them to the original loss would double count transmission. Outside-creditor losses are included in the final original-loss allocation; no additional fire-sale, funding-run or output loss is introduced.
- The separate lending bar assumes banks restore the starting aggregate book equity/assets ratio by letting assets repay at par, with all adjustment assigned to loans and capped by the observed loan book. The loan-book cap can leave an unresolved capital shortfall; restoration is not guaranteed. It is a capacity sensitivity, not an executed transaction, regulatory capital test or lending forecast. It is not converted into GDP or jobs without a separately supported behavioral link.
Maximum round: original loss - equity absorption - outside allocation - pending allocation: 2.27e-13; Maximum settled group: assets - liabilities - equity: 4.55e-13; Final aggregate assets - liabilities - equity: 0.00e+00; Final original loss allocation: -2.27e-13; Assets lost = original external loss + internal claim write-downs: -4.55e-13
How this becomes a macroeconomic vulnerability
Read the balance sheets and the arrows together
The first bars show the observed total balance sheet. The network divides it into six invented groups and embeds assumed claims within those totals. Arrow amounts are exposures or transmitted claim losses, not extra US assets. FDIC aggregate data cannot tell us which bank lends to which other institution.
Do not sum every write-down as an extra economic loss
A loss passed along several claims can generate several accounting entries. Final equity losses plus final outside-creditor losses exhaust the original external loss here. A separate fire sale can create additional losses, but that mechanism is not included in this exercise.
How contagion reaches the macroeconomy
Banks may rebuild capital by retaining profits, raising equity, selling assets or reducing loans. The final lending bar shows one severe assumption: contract loans toward the starting book equity/assets ratio. Contraction is capped by the loan book, so an unresolved capital shortfall can remain. It is a sensitivity, not a capital regulation, GDP loss or employment forecast.
Deposit insurance and policy change who bears losses
Actual resolution follows claim seniority, collateral, legal rules, deposit insurance and possible liquidity support. This simple chain uses a declared loss priority. It does not estimate taxpayer costs or the exposure network of US banks, insurers, funds or private-credit vehicles.
How can losses at one institution reach another?
A loan is one institution's asset and another's liability. If the borrower cannot repay in full, its creditor loses an asset. Equity can absorb that loss; when it is exhausted, the creditor may pass losses to its own creditors. Shared asset holdings, margin calls and funding withdrawals provide other transmission channels.
- A borrower suffers an asset loss.
- The loss exceeds its equity and reduces payments to a creditor.
- That creditor absorbs the loss or passes a shortfall further through the network.
Synthetic teaching example · not a forecast
Who ultimately absorbs a 30-million loss?
Synthetic institutions; all amounts are million currency units. A starts with external assets of 40, owes B 20 and has equity of 20. B holds the 20 claim on A and owes C 15. B's equity starts at 5; raising it adds an equal amount of cash to B, leaving both credit claims fixed. C holds the 15 claim on B, has no debt and begins with equity of 15. Claims settle once, in order; no new price shock is introduced.
B claim loss = min(20, max(0, initial loss - 20)); C claim loss = min(15, max(0, B claim loss - B equity)). Final equity losses at A, B and C sum to the original external asset loss.
A's external assets lose 30 million. B's claim loses 10 million; C's claim loses 5 million. Final equity losses are A 20 + B 5 + C 5 = 30 million. Successive claim write-downs are not added to that original loss.
Evidence to watch
Keep each observation’s definition, date and reporting frequency. A daily page refresh does not create new daily balance-sheet data.
| Factor | Unit | Frequency / timing | How to read it |
|---|---|---|---|
| Creditor exposures | Currency by borrower and instrument; exposure / equity | Positions change daily; public snapshots are often quarterly | Identify who owes whom. A large exposure relative to the lender's loss buffer can transmit a concentrated shock. |
| Equity and loss-absorbing resources | Currency and a clearly defined capital ratio | Quarterly financial or regulatory reports; updated after material events | Separate capital that absorbs losses from cash that meets payments. Book and market values answer different questions. |
| Funding and collateral terms | Payments due by horizon, margin calls and haircut percentages | Contract terms plus daily or intraday positions | Withdrawals or additional collateral demands can force sales before final credit losses are known. |
| Common asset holdings | Currency exposure to the same assets or markets | Holdings snapshots with market prices at their own dates | Several institutions can be exposed to one price decline. Holdings overlap is distinct from a direct loan between them. |
What this example leaves out
- The named institutions and every amount are illustrative. This is a direct-credit-loss allocation, not an observed financial network or a probability of failure.
- The example has no fire sales, collateral calls, deposit runs, netting, competing creditor seniorities, recovery delays or policy intervention. Those channels need separate assumptions and accounting.
- Its arrows transmit one original asset loss. Adding all successive write-downs would double count that loss; a separate price or output loss would need its own causal and accounting boundary.
- A current contagion assessment needs dated bilateral exposures, capital and funding terms with explicit missing coverage. Nonbanks are diverse; size alone does not establish vulnerability.
These mechanisms can overlap. Adding their example outputs does not produce an overall fragility score or a recession probability.
Further mechanism sources
- FSB: Leverage in Nonbank Financial Intermediation, final report (2025)
- FSB: Global Monitoring Report on Nonbank Financial Intermediation 2025, including bank-nonbank links
Observed US starting values and their dates are attributed above. The smaller example uses authored numbers; all stress paths retain their own stated assumptions.
Explore the other dimensions
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