Systemic capital requirements

Lewis Webber and Matthew Willison

No 436, Bank of England working papers from Bank of England

Abstract: The credit risk that an individual bank poses to the rest of the financial system depends on its size, the type of exposures it has to the real economy, and its obligations to other institutions. This paper describes a system-wide risk management approach to calibrating individual banks’ capital requirements that takes into account these factors and which correspond to a policymaker’s chosen target for systemic credit risk. The optimisation strategy identifies the minimum level of aggregate capital for the system and its distribution across banks that are consistent with a chosen objective for systemic credit risk. This parameterises a trade-off between efficiency and stability.

Keywords: Financial stability; systemic risk; capital requirements; structural credit risk model; financial networks; non-linear constrained optimisation (search for similar items in EconPapers)
JEL-codes: C61 C63 G01 G21 G28 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2011-10-13
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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Chapter: Systemic capital requirements (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0436

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