Systemic Capital Requirements

32 Pages Posted: 19 Oct 2011

Date Written: October 13, 2011

Abstract

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 optimization 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 parameterizes a trade-off between efficiency and stability.

Keywords: financial stability, systemic risk, capital requirements, structural credit risk model, financial networks, non-linear constrained optimisation

JEL Classification: C61, C63, G01, G21, G28

Suggested Citation

Webber, Lewis and Willison, Matthew, Systemic Capital Requirements (October 13, 2011). Bank of England Working Paper No. 436. Available at SSRN: https://ssrn.com/abstract=1945654 or http://dx.doi.org/10.2139/ssrn.1945654

Lewis Webber (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Matthew Willison

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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