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Systemic capital requirements

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  • Webber, Lewis

    ()
    (Bank of England)

  • Willison, Matthew

    ()
    (Bank of England)

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    Abstract

    The credit risk that an individual bank poses to the rest of the financial system depends on its size, the type of exposures it has to the real economy, and its obligations to other institutions. This paper describes a system-wide risk management approach to calibrating individual banks’ capital requirements that takes into account these factors and which correspond to a policymaker’s chosen target for systemic credit risk. The optimisation strategy identifies the minimum level of aggregate capital for the system and its distribution across banks that are consistent with a chosen objective for systemic credit risk. This parameterises a trade-off between efficiency and stability.

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    File URL: http://www.bankofengland.co.uk/research/Documents/workingpapers/2011/wp436.pdf
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    Bibliographic Info

    Paper provided by Bank of England in its series Bank of England working papers with number 436.

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    Length: 32 pages
    Date of creation: 13 Oct 2011
    Date of revision:
    Handle: RePEc:boe:boeewp:0436

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    Related research

    Keywords: Financial stability; systemic risk; capital requirements; structural credit risk model; financial networks; non-linear constrained optimisation;

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    References

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    1. Iman van Lelyveld & Franka Liedorp, 2004. "Interbank Contagion in the Dutch Banking Sector," DNB Working Papers, Netherlands Central Bank, Research Department 005, Netherlands Central Bank, Research Department.
    2. Iman van Lelyveld & Franka Liedorp, 2006. "Interbank Contagion in the Dutch Banking Sector: A Sensitivity Analysis," International Journal of Central Banking, International Journal of Central Banking, International Journal of Central Banking, vol. 2(2), May.
    3. Admati, Anat R. & DeMarzo, Peter M. & Hellwig, Martin F. & Pfleiderer, Paul, 2010. "Fallacies, Irrelevant Facts, and Myths in the Discussion of Capital Regulation: Why Bank Equity Is Not Expensive," Research Papers, Stanford University, Graduate School of Business 2065, Stanford University, Graduate School of Business.
    4. Elsinger, Helmut & Lehar, Alfred & Summer, Martin, 2005. "Using Market Information for Banking System Risk Assessment," MPRA Paper 817, University Library of Munich, Germany.
    5. Piergiorgio Alessandri & Prasanna Gai & Sujit Kapadia & Nada Mora & Claus Puhr, 2009. "Towards a Framework for Quantifying Systemic Stability," International Journal of Central Banking, International Journal of Central Banking, International Journal of Central Banking, vol. 5(3), pages 47-81, September.
    6. Celine Gauthier & Alfred Lehar & Moez Souissi, 2010. "Macroprudential Regulation and Systemic Capital Requirements," Working Papers, Bank of Canada 10-4, Bank of Canada.
    7. Upper, Christian, 2011. "Simulation methods to assess the danger of contagion in interbank markets," Journal of Financial Stability, Elsevier, Elsevier, vol. 7(3), pages 111-125, August.
    8. Larry Eisenberg & Thomas H. Noe, 2001. "Systemic Risk in Financial Systems," Management Science, INFORMS, INFORMS, vol. 47(2), pages 236-249, February.
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    Cited by:
    1. Andrey Itkin & Alexander Lipton, 2014. "Efficient solution of structural default models with correlated jumps. A fractional PDE approach," Papers 1408.6513, arXiv.org.

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