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

Author/Editor:

Jorge A Chan-Lau

Publication Date:

April 1, 2010

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

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.

Series:

Working Paper No. 2010/098

Subject:

Asset valuation Banking Credit risk Financial crises Systemic risk

English

Publication Date:

April 1, 2010

ISBN/ISSN:

9781451982756/1018-5941

Stock No:

WPIEA2010098

Pages:

25

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