What Matters in Determining Capital Surcharges for Systemically Important Financial Institutions?
AbstractOne way of internalizing the externalities that each individual bank imposes on the rest of the financial system is to impose capital surcharges on them in line with their systemic importance. Given the complexity of the financial system and the resulting difficulties in measuring systemic importance, it is sometimes argued that higher capital surcharges should be applied to larger banks, abstracting from other factors like interconnectedness. In this paper, the authors consider different network structures of the banking system that are characterized by two different centrality measures. Their main finding is that size alone is not always a good proxy for systemic importance: it must be supplemented with detailed information on interbank exposures. A relatively small bank playing an outsized role in the interbank market might be more systemic, and thus garner a higher capital surcharge, than a less-connected bank of somewhat larger size. Alternatively, if the centrality of banks in an interbank network is positively correlated with their size, then proxies of a bank’s systemic importance largely based on size are sufficient indicators.
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Bibliographic InfoPaper provided by Bank of Canada in its series Discussion Papers with number 11-9.
Length: 19 pages
Date of creation: 2011
Date of revision:
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Financial system regulation and policies;
Find related papers by JEL classification:
- G01 - Financial Economics - - General - - - Financial Crises
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
- C81 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Microeconomic Data
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
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- David Xiao Chen & H. Evren Damar & Hani Soubra & Yaz Terajima, 2012. "Canadian Bank Balance-Sheet Management: Breakdown by Types of Canadian Financial Institutions," Discussion Papers 12-7, Bank of Canada.
- Löffler, Gunter & Raupach, Peter, 2013. "Robustness and informativeness of systemic risk measures," Discussion Papers 04/2013, Deutsche Bundesbank, Research Centre.
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