Regulatory Capital Charges for Too-Connected-to-Fail Institutions: A Practical Proposal

April 1, 2010

Preview Citation

Format: Chicago

Jorge A Chan-Lau. Regulatory Capital Charges for Too-Connected-to-Fail Institutions: A Practical Proposal, (USA: International Monetary Fund, 2010) accessed September 20, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Asset valuation, Banking, Credit risk, Financial crises, Systemic risk

Keywords: Capital charge, Financial system, Loss distribution, Probability of default, WP

Publication Details

Pages:

25
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2010/098
Stock No:

WPIEA2010098
ISBN:

9781451982756
ISSN:

1018-5941

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