The impact of imposing capital requirements on systemic risk

Journal of Financial Stability, 2013, vol. 9, issue 3, 320-329

Abstract: This paper examines the impact of imposing capital requirements on systemic risk. We use a static model on financial institutions’ risk-taking behavior to quantify the systemic risk in the cross-sectional dimension in both regulated and unregulated systems. Although imposing a capital requirement can lower individual risk, it simultaneously enhances systemic linkage within the system. By using a proper systemic risk measure combining both individual risk and systemic linkage, we show that systemic risk in a regulated system can be higher than that in an unregulated system. In addition, we analyze a sufficient condition under which the systemic risk in a regulated system is always lower.

Keywords: Systemic risk; Capital requirement; macro-prudential regulation (search for similar items in EconPapers)
JEL-codes: G01 G28 G32 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (15)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:9:y:2013:i:3:p:320-329

DOI: 10.1016/j.jfs.2013.06.002

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