Can we prove a bank guilty of creating systemic risk? A minority report

Jon Danielsson, Kevin R. James, Marcela Valenzuela and Ilknur Zer

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Since increasing a bank's capital requirement to improve the stability of the financial system imposes costs upon the bank, a regulator should ideally be able to prove beyond a reasonable doubt that banks classified as systemically risky really do create systemic risk before subjecting them to this capital punishment. Evaluating the performance of two leading systemic risk models, we show that estimation error alone prevents the reliable identification of the most systemically risky banks. We conclude that it will be a considerable challenge to develop a riskometer that is both sound and reliable enough to provide an adequate foundation for macroprudential policy.

Keywords: systemic risk; macroprudential policy; financial stability; risk management (search for similar items in EconPapers)
JEL-codes: G32 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2015-09
New Economics Papers: this item is included in nep-cba, nep-cfn, nep-mon and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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http://eprints.lse.ac.uk/65097/ Open access version. (application/pdf)

Related works:
Journal Article: Can We Prove a Bank Guilty of Creating Systemic Risk? A Minority Report (2016)
Working Paper: Can we prove a bank guilty of creating systemic risk? A minority report (2016)
Working Paper: Can we prove a bank guilty of creating systemic risk? A minority report (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:65097

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