Centrality-based Capital Allocations
Electronic Access:
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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.
Series:
Working Paper No. 2014/237
Subject:
Banking Commercial banks Credit Credit risk Financial institutions Financial markets Financial regulation and supervision Interbank markets Loans Money
English
Publication Date:
December 24, 2014
ISBN/ISSN:
9781498315548/1018-5941
Stock No:
WPIEA2014237
Pages:
40
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