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Can we prove a bank guilty of creating systemic risk? A minority report

Danielsson, Jon, James, Kevin R., Valenzuela, Marcela and Zer, Ilknur (2015) Can we prove a bank guilty of creating systemic risk? A minority report. Systemic Risk Centre Discussion Papers (47). Systemic Risk Centre, The London School of Economics and Political Science, London, UK.

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Abstract

Since increasing a bank's capital requirement to improve the stability of the financial system imposes costs upon the bank, a regulator should ideally be able to prove beyond a reasonable doubt that banks classified as systemically risky really do create systemic risk before subjecting them to this capital punishment. Evaluating the performance of two leading systemic risk models, we show that estimation error alone prevents the reliable identification of the most systemically risky banks. We conclude that it will be a considerable challenge to develop a riskometer that is both sound and reliable enough to provide an adequate foundation for macroprudential policy.

Item Type: Monograph (Discussion Paper)
Official URL: https://www.systemicrisk.ac.uk/
Additional Information: © 2015 The Authors
Divisions: Finance
Systemic Risk Centre
Financial Markets Group
Subjects: H Social Sciences > HC Economic History and Conditions
H Social Sciences > HG Finance
JEL classification: G - Financial Economics > G1 - General Financial Markets > G10 - General
G - Financial Economics > G1 - General Financial Markets > G18 - Government Policy and Regulation
G - Financial Economics > G2 - Financial Institutions and Services > G20 - General
G - Financial Economics > G2 - Financial Institutions and Services > G28 - Government Policy and Regulation
G - Financial Economics > G3 - Corporate Finance and Governance > G38 - Government Policy and Regulation
Date Deposited: 21 Jun 2023 14:39
Last Modified: 16 Sep 2023 00:03
URI: http://eprints.lse.ac.uk/id/eprint/119462

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