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Dealing with systematic risk when we measure it badly

Danielsson, Jon and James, Kevin R. and Valenzuela, Marcela and Zer, Ilknur (2012) Dealing with systematic risk when we measure it badly. European Center for Advanced Research in Economics and Statistics.

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Abstract

While an omniscient regulator would base a bank's capital requirement upon its contribution to systemic risk, we show that a regulator who measures a bank's contribution to systemic risk badly will find it optimal to use a simple leverage ratio instead. We empirically analyze the performance of leading risk measurement methods and find that they are incapable of providing either precise estimates of an individual bank's contribution to systemic risk or reliable rankings of banks by the amount of systemic risk they create. We conclude that a leverage ratio dominates a policy of systemic risk based capital requirements.

Item Type: Monograph (Working Paper)
Official URL: http://www.ecares.org/
Additional Information: © 2012 The Authors
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
Sets: Departments > Finance
Collections > Economists Online
Research centres and groups > Financial Markets Group (FMG)
Collections > LSE Financial Markets Group (FMG) Working Papers
Date Deposited: 16 Apr 2012 15:11
Last Modified: 27 Feb 2014 15:35
URI: http://eprints.lse.ac.uk/id/eprint/43135

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