Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/148113
Authors: 
Fique, José
Year of Publication: 
2016
Series/Report no.: 
Bank of Canada Staff Working Paper 2016-6
Abstract: 
To address the challenges posed by global systemically important banks (G-SIBs), the Basel Committee on Banking Supervision recommended an "additional loss absorbency requirement" for these institutions. Along these lines, I develop a microfounded design of capital surcharges that target the interconnectedness component of systemic risk. These surcharges increase the costs of establishing interbank connections, which leads to a non-monotonic welfare effect. While reduced interconnectedness decreases welfare by restricting the ability of banks to insure against liquidity shocks, it also increases it by reducing contagion when an interconnected bank fails. Thus, the regulator faces a trade-off between efficiency and financial stability. Furthermore, I show that capital requirements are more effective than default fund contributions when tail-risk exposure is the private information of banks. I conclude by analyzing how resolution regimes and stable funding requirements interact with these surcharges.
Subjects: 
Financial institutions
Financial system regulation and policies
JEL: 
D82
D85
G21
G28
Document Type: 
Working Paper

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