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

By J. Chan-Lau. Social Science Research Network, 2010

117 citations recorded by the source corpus.

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.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/922f7424248528da7e8dafbf7053b8ae33bf5f02

How researchers see this paper

The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.

In Economics and Econometrics

1. Yi Tang
2. Linda Allen
3. Stijn Ferrari
4. Carlos Castro
5. Turan G. Bali
6. Marco Rocco
7. Stephen J. Brown
8. M. O. Caglayan

In Finance

1. Yi Tang
2. Linda Allen
3. Turan G. Bali
4. Stijn Ferrari
5. Carlos Castro
6. Marco Rocco
7. Hao Zhou
8. Stephen J. Brown

Citations in the corpus

• Measuring and testing for the systemically important financial institutions (2012, background): “…and rankings of systemic importance have been provided in several applications (and extensions) of ∆CoV aR (see e.g., Fong et al., 2009; IMF, 2009; Chan-Lau, 2010a,b; Deutsche Bundesbank, 2010; Gauthier, Lehar and Souissi, 2010; Jager-Ambrozewiez, 2010; Girardi and Ergun, 2011; and…”
• Does Systemic Risk in the Financial Sector Predict Future Economic Downturns (2012, background): “2010), CoVaR (Adrian and Brunnermeier 2009), conditional tail risk (CTR; see Kelly 2011), corisk (Chan-Lau 2009), a contingent claims approach (Gray and Jobst 2009), Shapely values (Tarashev, Borio, and Tsatsaronis 2009), and the IMF risk budgeting and standardized approaches (Espinosa-Vega, Kahn, a”