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Macroprudential Capital Requirements and Systemic Risk
Year Of Publication: 2010
Month Of Publication: July
Pages: 38
Download Count: 8
View Count: 1987
Comment Num: 0
Language: English
Source: working paper
Who Can Read: Free
Date: 9-8-2010
Publisher: Administrator
Summary
In our paper we compare alternative mechanisms for allocating the overall risk of a banking system to its member banks. We explicitly take into account that overall risk as well as each bank’s risk contribution changes once bank capital requirements change and therefore assign capital requirements based on a fixed point at which risk contributions equal capital requirements.To measure how systemic risk changes with bank capital we use a model that explicitly incorporates contagion externalities present in the financial system. We have access to a unique data set of the Canadian banking system, which includes individual banks’ loan books, risk exposures, as well as detailed information on interbank linkages including OTC derivatives. We find that macroprudential capital allocations can differ by as much as 50% from observed capital levels and are not trivially related to bank size or individual bank default probability. Macroprudential capital allocation mechanisms reduce default prob
Author(s)
Lehar, Alfred Sign in to follow this author
Gauthier, Céline Sign in to follow this author
Souissi, Moez Sign in to follow this author
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