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Regulatory Capital Charges for too-Connected-To-Fail Institutions

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  • Jorge A. Chan-Lau

Abstract

The recent financial crisis has highlighted once more that interconnectedness in the financial system is a major source of systemic risk. I suggest a practical way to levy regulatory capital charges based on the degree of interconnectedness among financial institutions. Namely, the charges are based on the institution’s incremental contribution to systemic risk. The imposition of such capital charges could go a long way towards internalizing the negative externalities associated with too-connected-to-fail institutions and providing managerial incentives to strengthen an institution’s solvency position, and avoid too much homogeneity and excessive reliance on the same counterparties in the financial industry.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 10/98.

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Length: 25
Date of creation: 01 Apr 2010
Date of revision:
Handle: RePEc:imf:imfwpa:10/98

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Related research

Keywords: Financial institutions; Banking sector; Credit risk; Financial risk; Financial stability; Global Financial Crisis 2008-2009; probability; probability of default; probabilities; correlation; equation; banking; bank of canada; correlations; monte carlo simulation; banking supervision; bank failures; linear regression; bank defaults; equations; settlement risk; investment bank; statistical methods; independent variable; capital requirement; settlement system; scatter plot; computation; survey; basel accord; normal distributions; time series; normal distribution; bank liabilities; skewness; random variables; banking crisis; statistical technique; bank of england;

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Cited by:
  1. Christian Weistroffer, 2011. "Identifying Systemically Important Financial Institutions (SIFIs)," Working Papers id:4383, eSocialSciences.
  2. Clara Lía Machado & Carlos León & Miguel Sarmiento & Freddy Cepeda & Orlando Chipatecua & Jorge cely, . "Riesgo Sistémico y Estabilidad del Sistema de Pagos de Alto Valor en Colombia: Análisis bajo Topología de Redes y Simulación de Pagos," Borradores de Economia 627, Banco de la Republica de Colombia.
  3. José E. Gómez-González & Luis Fernando Melo Velandia, 2013. "Efectos de “ángeles caídos” en el mercado accionario colombiano: estudio de eventos del caso Interbolsa," Borradores de Economia 779, Banco de la Republica de Colombia.
  4. Co-Pierre Georg, 2011. "Basel III ans Systemic Risk Regulation - What Way Forward?," Global Financial Markets Working Paper Series 17-2011, Friedrich-Schiller-University Jena.
  5. Xiao Qin & Chen Zhou, 2013. "Systemic Risk Allocation for Systems with A Small Number of Banks," DNB Working Papers 378, Netherlands Central Bank, Research Department.
  6. Castro, Carlos & Ferrari, Stijn, 2014. "Measuring and testing for the systemically important financial institutions," Journal of Empirical Finance, Elsevier, vol. 25(C), pages 1-14.
  7. Edgardo Demaestri & Gustavo Ferro, 2013. "Analysis of the Integration of Financial Regulation and Supervision to the Central Bank," Ensayos Económicos, Central Bank of Argentina, Economic Research Department, vol. 1(68), pages 75-106, June.
  8. Xin Huang & Hao Zhou & Haibin Zhu, 2011. "Systemic risk contributions," BIS Papers chapters, in: Bank for International Settlements (ed.), Macroprudential regulation and policy, volume 60, pages 36-43 Bank for International Settlements.
  9. Sheri M. Markose, 2012. "Systemic Risk from Global Financial Derivatives," IMF Working Papers 12/282, International Monetary Fund.
  10. Andreas A. Jobst & Dale F. Gray, 2013. "Systemic Contingent Claims Analysis," IMF Working Papers 13/54, International Monetary Fund.
  11. Ojo, Marianne, 2010. "Measures aimed at mitigating pro cyclical effects of the Capital Requirements Framework: counter cyclical capital buffer proposals," MPRA Paper 24610, University Library of Munich, Germany.
  12. Carlos Castro & Juan Sebastian Ordoñez, 2012. "A Network model of systemic risk: identifying the sources of dependence across institutions," DOCUMENTOS DE TRABAJO 009651, UNIVERSIDAD DEL ROSARIO.
  13. Jobst, Andreas A., 2013. "Multivariate dependence of implied volatilities from equity options as measure of systemic risk," International Review of Financial Analysis, Elsevier, vol. 28(C), pages 112-129.
  14. Diego Avanzini & Alejandro Jara, 2013. "A PCA Approach to Common Risk Exposures in the Chilean Banking System," Working Papers Central Bank of Chile 707, Central Bank of Chile.

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