Regulatory Capital Charges for Too-Connected-to-Fail Institutions: A Practical Proposal

Jorge Chan-Lau

No 2010/098, IMF Working Papers from International Monetary Fund

Abstract: The recent financial crisis has highlighted once more that interconnectedness in the financial system is a major source of systemic risk. I suggest a practical way to levy regulatory capital charges based on the degree of interconnectedness among financial institutions. Namely, the charges are based on the institution’s incremental contribution to systemic risk. The imposition of such capital charges could go a long way towards internalizing the negative externalities associated with too-connected-to-fail institutions and providing managerial incentives to strengthen an institution’s solvency position, and avoid too much homogeneity and excessive reliance on the same counterparties in the financial industry.

Keywords: WP; capital charge; financial system; probability of default; loss distribution (search for similar items in EconPapers)
Pages: 25
Date: 2010-04-01
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Citations: View citations in EconPapers (50)

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