Systemic Risk and Financial Regulation (in Korean)

Seung Hwan Lee ()
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Seung Hwan Lee: Economic Research Institute, The Bank of Korea

Economic Analysis (Quarterly), 2011, vol. 17, issue 3, 1-42

Abstract: This paper examines the relationship between systemic risk and financial regulations under the Basel â…¢ framework. In order to incorporate financial regulations into a systemic risk model, we construct an integrated systemic risk model which combines four systemic risk factors; common exposures, default contagion, funding liquidity risk, and mark-to-market losses. We perform a simulation with the integrated model and find that pre-crisis financial regulations contribute to the reduction of systemic risk, while strict post-crisis regulations may induce fire sale of illiquid assets, thereby increasing systemic risk. Secondly, for the reduction of fire-sale losses in periods of crisis, it is desirable to ease capital regulation by allowing banks to draw down capital conservation buffer and countercyclical capital buffer. However, it should be noted that overly relaxed regulation can raise systemic risk since there exists a trade-off between decreasing fire-sale losses and increasing resilience.

Keywords: Systemic risk; Financial regulation; Basel â…¢; Contagion; Funding liquidity (search for similar items in EconPapers)
JEL-codes: G01 G21 G28 (search for similar items in EconPapers)
Date: 2011
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Persistent link: https://EconPapers.repec.org/RePEc:bok:journl:v:17:y:2011:i:3:p:1-42

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