Centrality-Based Capital Allocations
41 Pages Posted: 6 Feb 2015
Date Written: December 2014
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: Suggested Citation