Systemic capital requirements

Working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 07 October 2011

Working Paper No. 436
By Lewis Webber and Matthew Willison 

The credit risk that an individual bank poses to the rest of the financial system depends on its size, the type of exposures it has to the real economy, and its obligations to other institutions. This paper describes a system-wide risk management approach to calibrating individual banks’ capital requirements that takes into account these factors and which correspond to a policymaker’s chosen target for systemic credit risk. The optimisation strategy identifies the minimum level of aggregate capital for the system and its distribution across banks that are consistent with a chosen objective for systemic credit risk. This parameterises a trade-off between efficiency and stability.

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