EconPapers    
Economics at your fingertips  
 

Asset correlation and bank capital regulation: A macroprudential perspective

Sangwon Suh ()

International Review of Economics & Finance, 2019, vol. 62, issue C, 355-378

Abstract: Strong asset correlation across financial institutions may pose a high systemic risk if a common shock negatively affects asset values. In this paper, we present a simple model with multiple banks in which bank defaults are correlated with one another and elicit macroprudential implications of asset correlation on bank capital regulation. We analytically show that if bank failure exhibits an increasing social cost to scale property, the optimal bank capital level becomes higher as asset correlations across banks become stronger. We also apply our analysis into the savings bank crisis in Korea and find empirical evidences supporting the macroprudential importance of asset correlation across banks. Strong asset correlation across banks may lead to the so-called “too-many-to-fail” problem under regulation forbearance. Our findings suggest that, analogously to bank capital surcharges for the systemically important financial institutions to prevent the “too-big-to-fail” problem in the Basel III framework, another bank capital surcharge could preemptively respond to the “too-many-to-fail” problem.

Keywords: Asset correlation; Systemic risk; Too many to fail; Optimal capital regulation; Basel III (search for similar items in EconPapers)
JEL-codes: G28 G18 (search for similar items in EconPapers)
Date: 2019
References: Add references at CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1059056018300182
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:62:y:2019:i:c:p:355-378

DOI: 10.1016/j.iref.2019.04.006

Access Statistics for this article

International Review of Economics & Finance is currently edited by H. Beladi and C. Chen

More articles in International Review of Economics & Finance from Elsevier
Bibliographic data for series maintained by Haili He ().

 
Page updated 2020-06-26
Handle: RePEc:eee:reveco:v:62:y:2019:i:c:p:355-378