Working Paper

Centrality-based Capital Allocations

Abstract: This paper looks at the effect of capital rules on a banking system that is connected through correlated credit exposures and interbank lending. Keeping total capital in the system constant, the reallocation rules, which combine individual bank characteristics and interconnectivity measures of interbank lending, are to minimize a measure of systemwide losses. Using the detailed German Credit Register for estimation, we find that capital rules based on eigenvectors dominate any other centrality measure, saving about 15 percent in expected bankruptcy costs.

Keywords: interbank connectivity; capital requirements; credit exposures; bankruptcy costs; banking system; systemic risk; bank contagion; network centrality measure;

JEL Classification: G21; C15; G28; C81;

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Bibliographic Information

Provider: Federal Reserve Bank of Cleveland

Part of Series: Working Papers (Old Series)

Publication Date: 2015-02-13

Number: 1501

Pages: 41 pages