Centrality-Based Capital Allocations

41 Pages Posted: 19 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: January 18, 2015

Abstract

This paper looks at the effect of capital rules on a banking system that is connected through correlated credit exposures and interbank lending. Keeping total capital in the system constant, the reallocation rules, which combine individual bank characteristics and interconnectivity measures of interbank lending, are to minimize a measure of systemwide losses. Using the detailed German Credit Register for estimation, we find that capital rules based on eigenvectors dominate any other centrality measure, saving about 15 percent in expected bankruptcy costs.

Keywords: interbank connectivity, credit exposures, capital requirements, banking system, bank contagion, network centrality measure, bankruptcy costs, systemic risk.

JEL Classification: G21, G28, C15, C81

Suggested Citation

Alter, Adrian and Craig, Ben R. and Raupach, Peter, Centrality-Based Capital Allocations (January 18, 2015). FRB of Cleveland Working Paper No. 15-01. Available at SSRN: https://ssrn.com/abstract=2566747 or http://dx.doi.org/10.2139/ssrn.2566747

Adrian Alter

International Monetary Fund ( email )

700 19th St NW
Washington, DC 20431
United States

Ben R. Craig (Contact Author)

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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