Centrality-based Capital Allocations

By Adrian Alter, Ben Craig, Peter Raupach

December 24, 2014

Preview Citation

Format: Chicago

Adrian Alter, Ben Craig, and Peter Raupach. Centrality-based Capital Allocations, (USA: International Monetary Fund, 2014) accessed November 21, 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

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

Publication Details

Pages:

40
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2014/237
Stock No:

WPIEA2014237
ISBN:

9781498315548
ISSN:

1018-5941

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