Capital and resolution policies: The US interbank market
John M. Dooley,
Mikhail Oet () and
Stephen J. Ong
Journal of Financial Stability, 2017, vol. 30, issue C, 229-239
We develop an empirically based simulation study to test two types of policies designed to control systemic risk: preventive policies targeting capital requirements and mitigation policies targeting default resolution. We find that capital buffers reduce both the number of defaults and the resulting losses. The loss reduction benefit increases as the magnitude of adverse shocks becomes higher. We find that a simple branch-breakup resolution strategy reduces the loss borne by the Federal Deposit Insurance Corporation (FDIC). The mitigation effect becomes higher as the fraction of assets resolved through auctions and auction competitiveness increase.
Keywords: Bank resolution; Capital policy; Systemic risk; Policy simulation; Collateralized interbank market (search for similar items in EconPapers)
JEL-codes: C60 C79 G10 G18 G21 D85 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:30:y:2017:i:c:p:229-239
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