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

Danielsson, Jon and James, Kevin R. and Valenzuela, Marcela and Zer, Ilknur (2015) Can we prove a bank guilty of creating systemic risk?: a minority report. SRC Discussion Paper, No 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: http://www.systemicrisk.ac.uk/
Additional Information: © 2015 The Authors
Divisions: Finance
Systemic Risk Centre
Financial Markets Group
Subjects: H Social Sciences > HD Industries. Land use. Labor > HD61 Risk Management
H Social Sciences > HG Finance
Sets: Departments > Finance
Research centres and groups > Systemic Risk Centre
Research centres and groups > Financial Markets Group (FMG)
Date Deposited: 21 Jan 2016 14:13
Last Modified: 12 Dec 2017 08:07
Projects: ES/K002309/1
Funders: ESRC
URI: http://eprints.lse.ac.uk/id/eprint/65097

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