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The impact of imposing capital requirements on systemic risk

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  • Zhou, Chen

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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  • Zhou, Chen, 2013. "The impact of imposing capital requirements on systemic risk," Journal of Financial Stability, Elsevier, vol. 9(3), pages 320-329.
    • Handle: RePEc:eee:finsta:v:9:y:2013:i:3:p:320-329
    DOI: 10.1016/j.jfs.2013.06.002
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    Cited by:

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    3. De Genaro, Alan & Salvador, Pedro Ivo Camacho A. & Fernandes, Ivan Filipe, 2021. "Market power and banking regulations: Evidence from RDD application to the Brazilian banking market," Economics Letters, Elsevier, vol. 202(C).
    4. Radoslav Raykov, 2021. "Systemic Risk and Portfolio Diversification: Evidence from the Futures Market," Staff Working Papers 21-50, Bank of Canada.
    5. Gündüz, Yalin, 2020. "The market impact of systemic risk capital surcharges," Discussion Papers 09/2020, Deutsche Bundesbank.
    6. Qianqian Gao & Hong Fan, 2020. "Macroprudential regulation for a dynamic Chinese banking system with a scale-free network," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 15(3), pages 579-611, July.
    7. Andre R. Neveu, 2018. "A survey of network-based analysis and systemic risk measurement," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 13(2), pages 241-281, July.
    8. Agur, Itai, 2014. "Bank risk within and across equilibria," Journal of Banking & Finance, Elsevier, vol. 48(C), pages 322-333.
    9. Lei Zhao, 2018. "Market†based estimates of implicit government guarantees in European financial institutions," European Financial Management, European Financial Management Association, vol. 24(1), pages 79-112, January.
    10. Qianqian Gao & Hong Fan & Shanshan Jiang, 2018. "Macroprudential Regulation for the Chinese Banking Network System with Complete and Random Structures," Sustainability, MDPI, vol. 11(1), pages 1-22, December.
    11. Luis Goncalves de Faria, 2022. "An Agent-Based Model With Realistic Financial Time Series: A Method for Agent-Based Models Validation," Papers 2206.09772, arXiv.org.
    12. Riccetti, Luca & Russo, Alberto & Mauro, Gallegati, 2013. "Financial Regulation in an Agent Based Macroeconomic Model," MPRA Paper 51013, University Library of Munich, Germany.
    13. Silva, Walmir & Kimura, Herbert & Sobreiro, Vinicius Amorim, 2017. "An analysis of the literature on systemic financial risk: A survey," Journal of Financial Stability, Elsevier, vol. 28(C), pages 91-114.

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    More about this item

    Keywords

    Systemic risk; Capital requirement; macro-prudential regulation;
    All these keywords.

    JEL classification:

    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G01 - Financial Economics - - General - - - Financial Crises
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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