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Journal of Financial Stability Vol. 30 2017

Capital and resolution policies: The US interbank market

Agostino Capponi1; John M. Dooley2; Mikhail V. Oet3,2; Stephen J. Ong2

1 Columbia University · 2 Federal Reserve Bank of Cleveland · 3 Case Western Reserve University

open access

Abstract

We develop an empirically based simulation study to test two types of policies designed to control systemic risk: preventive policies targeting capital requirements and mitigation policies targeting default resolution. We find that capital buffers reduce both the number of defaults and the resulting losses. The loss reduction benefit increases as the magnitude of adverse shocks becomes higher. We find that a simple branch-breakup resolution strategy reduces the loss borne by the Federal Deposit Insurance Corporation (FDIC). The mitigation effect becomes higher as the fraction of assets resolved through auctions and auction competitiveness increase.

DOI
10.1016/j.jfs.2016.04.010
Volume
30
Pages
229-239
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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