Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/273813 
Year of Publication: 
2023
Series/Report no.: 
Tinbergen Institute Discussion Paper No. TI 2023-002/IV
Publisher: 
Tinbergen Institute, Amsterdam and Rotterdam
Abstract: 
We address the problem of regulating the size of banks' macroprudential capital buffers by using market-based estimates of systemic risk and by developing a modeling mechanism through which capital buffers can be allocated efficiently across systemic banks. First, a Distance-to-Default type measure relates a bank's default risk to its capital requirements. Second, a correlation structure in the default dependencies between banks is estimated from co-movements in the single-name CDS spreads of the underlying banks. Third, risk minimization and equalization approaches are adopted to allocate the capital requirements in line with a policy balancing the social costs and benefits of higher capital requirements. The model is applied to the European banking sector.
Subjects: 
systemic risk
regulation
implied market measures
financial institutions
CDS rates
JEL: 
G01
G20
G18
G38
Document Type: 
Working Paper

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