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The impact of imposing capital requirements on systemic risk

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  • Zhou, Chen
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    Abstract

    This paper examines the impact of imposing capital requirements on systemic risk. We use a static model on financial institutions’ risk-taking behavior to quantify the systemic risk in the cross-sectional dimension in both regulated and unregulated systems. Although imposing a capital requirement can lower individual risk, it simultaneously enhances systemic linkage within the system. By using a proper systemic risk measure combining both individual risk and systemic linkage, we show that systemic risk in a regulated system can be higher than that in an unregulated system. In addition, we analyze a sufficient condition under which the systemic risk in a regulated system is always lower.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Financial Stability.

    Volume (Year): 9 (2013)
    Issue (Month): 3 ()
    Pages: 320-329

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    Handle: RePEc:eee:finsta:v:9:y:2013:i:3:p:320-329

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    Web page: http://www.elsevier.com/locate/jfstabil

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    Keywords: Systemic risk; Capital requirement; macro-prudential regulation;

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    Cited by:
    1. Itai Agur, 2011. "Bank Risk within and across Equilibria," DNB Working Papers 305, Netherlands Central Bank, Research Department.
    2. Riccetti, Luca & Russo, Alberto & Mauro, Gallegati, 2013. "Financial Regulation in an Agent Based Macroeconomic Model," MPRA Paper 51013, University Library of Munich, Germany.

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