Centrality-Based Capital Allocations

41 Pages Posted: 6 Feb 2015

See all articles by Adrian Alter

Adrian Alter

International Monetary Fund

Ben R. Craig

Federal Reserve Bank of Cleveland; Deutsche Bundesbank

Peter Raupach

Deutsche Bundesbank - Research Department

Multiple version iconThere are 4 versions of this paper

Date Written: December 2014

Abstract

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.

Keywords: Banking systems, Interconnectedness, Capital requirements, Credit risk, Systemic risk, Financial contagion, Econometric models, SIFIs, network analysis, banks, loans, lending, value, balance sheet, bankruptcy, financial institutions, migration, externalities, equity, property, interest, services, principal, risk management, industry, markets, foreign banks, financial services, pricing, market value, cooperative banks, commercial banks, risk factors, financial stability, debt, probability of default, present value, capitalization, payment systems, saving, bank failures, financial systems, maturities, banking supervision, financial markets, deposits, insurance

JEL Classification: C15, C81, G21, G28

Suggested Citation

Alter, Adrian and Craig, Ben R. and Raupach, Peter, Centrality-Based Capital Allocations (December 2014). IMF Working Paper No. 14/237. Available at SSRN: https://ssrn.com/abstract=2561282

Adrian Alter (Contact Author)

International Monetary Fund ( email )

700 19th St NW
Washington, DC 20431
United States

Ben R. Craig

Federal Reserve Bank of Cleveland ( email )

PO Box 6387
Cleveland, OH 44101
United States
216-579-2061 (Phone)
216-579-3050 (Fax)

Deutsche Bundesbank

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Peter Raupach

Deutsche Bundesbank - Research Department ( email )

Wilhelm-Epstein-Str. 14
Frankfurt, 60431
Germany
+49 69 9566 8536 (Phone)

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