Centrality-Based Capital Allocations

38 Pages Posted: 21 Jun 2016

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: 2015

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 14.6% in system losses as measured by expected bankruptcy costs.

Keywords: Capital Requirements, Centrality Measures, Contagion, Financial Stability

JEL Classification: G21, G28, C15, C81

Suggested Citation

Alter, Adrian and Craig, Ben R. and Raupach, Peter, Centrality-Based Capital Allocations (2015). Bundesbank Discussion Paper No. 03/2015. Available at SSRN: https://ssrn.com/abstract=2797028

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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