Centrality-based Capital Allocations
December 24, 2014
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Summary
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.
Subject: Banking, Commercial banks, Credit, Credit risk, Financial institutions, Financial markets, Financial regulation and supervision, Interbank markets, Loans, Money
Keywords: bank default, bank equity holder, bank PDs, banking system, capital allocation, capital reallocation, capital requirement, Commercial banks, Credit, Credit risk, default probability, equity holder, Global, IB exposure, interbank asset, interbank market, Interbank markets, interconnectedness, Loans, network analysis, SIFIs, systemic risk, way bank, WP
Pages:
40
Volume:
2014
DOI:
Issue:
237
Series:
Working Paper No. 2014/237
Stock No:
WPIEA2014237
ISBN:
9781498315548
ISSN:
1018-5941
