Journal of Financial Stability Vol. 9 No. 3 2013
The impact of imposing capital requirements on systemic risk
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.
- DOI
- 10.1016/j.jfs.2013.06.002
- Volume
- 9
- Issue
- 3
- Pages
- 320-329
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref