Systemic capital requirements
Lewis Webber and
No 436, Bank of England working papers from Bank of England
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
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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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