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Centrality-based Capital Allocations

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  • Adrian Alter
  • Ben Craig
  • Peter Raupach

Abstract

We look at the effect of capital rules on a banking system that is connected through correlated credit exposures and interbank lending. The rules, which combine individual bank characteristics and interconnectivity measures of interbank lending, are to minimize a measure of system-wide losses. Using the detailed German Credit Register for estimation, we find capital rules based on eigenvectors to dominate any other centrality measure, followed by closeness. Compared to the baseline case, capital reallocation based on the Adjacency Eigenvector saves about 15% in system losses as measured by expected bankruptcy costs.

Suggested Citation

  • Adrian Alter & Ben Craig & Peter Raupach, 2014. "Centrality-based Capital Allocations," IMF Working Papers 14/237, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:14/237
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Christoph Siebenbrunner, 2017. "Clearing algorithms and network centrality," Papers 1706.00284, arXiv.org.
    2. Sylvain Benoit & Jean-Edouard Colliard & Christophe Hurlin & Christophe Pérignon, 2017. "Where the Risks Lie: A Survey on Systemic Risk," Review of Finance, European Finance Association, vol. 21(1), pages 109-152.
    3. repec:bis:bisifc:45-06 is not listed on IDEAS
    4. Julia Müller & Thorsten Upmann, 2017. "Eigenvalue Productivity: Measurement of Individual Contributions in Teams," CESifo Working Paper Series 6679, CESifo Group Munich.
    5. Murat Cakir, 2017. "A conceptual design of "what and how should a proper macro-prudential policy framework be?" A globalistic approach to systemic risk and procuring the data needed," IFC Bulletins chapters,in: Bank for International Settlements (ed.), Uses of central balance sheet data offices' information, volume 45 Bank for International Settlements.
    6. Fink, Kilian & Krüger, Ulrich & Meller, Barbara & Wong, Lui-Hsian, 2015. "The credit quality channel: Modeling contagion in the interbank market," Discussion Papers 38/2015, Deutsche Bundesbank.
    7. repec:eee:ejores:v:270:y:2018:i:1:p:51-65 is not listed on IDEAS
    8. Fink, Kilian & Krüger, Ulrich & Meller, Barbara & Wong, Lui-Hsian, 2016. "The credit quality channel: Modeling contagion in the interbank market," Journal of Financial Stability, Elsevier, vol. 25(C), pages 83-97.
    9. Galina Hale & Tümer Kapan & Camelia Minoiu, 2016. "Crisis Transmission in the Global Banking Network," IMF Working Papers 16/91, International Monetary Fund.
    10. Betz, Frank & Hautsch, Nikolaus & Peltonen, Tuomas A. & Schienle, Melanie, 2016. "Systemic risk spillovers in the European banking and sovereign network," Journal of Financial Stability, Elsevier, vol. 25(C), pages 206-224.
    11. Paul Glasserman & H. Peyton Young, 2016. "Contagion in Financial Networks," Journal of Economic Literature, American Economic Association, vol. 54(3), pages 779-831, September.
    12. repec:bfr:bullbf:2018:218:03 is not listed on IDEAS
    13. Paul Glasserman, 2015. "Contagion in Financial Networks," Economics Series Working Papers 764, University of Oxford, Department of Economics.
    14. repec:ksa:szemle:1734 is not listed on IDEAS
    15. Paul Glasserman & H. Peyton Young, 2015. "Contagion in Financial Markets," Working Papers 15-21, Office of Financial Research, US Department of the Treasury.

    More about this item

    Keywords

    Financial contagion; Econometric models; Credit risk; Capital requirements; Banking systems; Interconnectedness; Systemic risk; SIFIs; network analysis; banks; bank; risk; credit; capital; Methodology for Collecting; Estimating; and Organizing Microeconomic Data; Government Policy and Regulation;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • 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; Data Access

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