Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/53944
Authors: 
Gauthier, Céline
Lehar, Alfred
Souissi, Moez
Year of Publication: 
2010
Series/Report no.: 
Bank of Canada Working Paper 2010,4
Abstract: 
In the aftermath of the financial crisis, there is interest in reforming bank regulation such that capital requirements are more closely linked to a bank's contribution to the overall risk of the financial system. In our paper we compare alternative mechanisms for allocating the overall risk of a banking system to its member banks. Overall risk is estimated using a model that explicitly incorporates contagion externalities present in the financial system. We have access to a unique data set of the Canadian banking system, which includes individual banks' risk exposures as well as detailed information on interbank linkages including OTC derivatives. We find that systemic capital allocations can differ by as much as 50% from 2008Q2 capital levels and are not related in a simple way to bank size or individual bank default probability. Systemic capital allocation mechanisms reduce default probabilities of individual banks as well as the probability of a systemic crisis by about 25%. Our results suggest that financial stability can be enhanced substantially by implementing a systemic perspective on bank regulation.
Subjects: 
Financial stability
JEL: 
G21
C15
C81
E44
Document Type: 
Working Paper

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