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

Danielsson, Jon ORCID: 0009-0006-9844-7960, James, Kevin R., Valenzuela, Marcela and Zer, Ilknur (2016) Can we prove a bank guilty of creating systemic risk? A minority report. Journal of Money, Credit and Banking, 48 (4). 795 - 812. ISSN 0022-2879

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Abstract

Because 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 sound and reliable enough to provide an adequate foundation for macroprudential policy.

Item Type:	Article
Official URL:	https://onlinelibrary.wiley.com/journal/15384616
Additional Information:	© 2016 The Authors
Divisions:	Finance Systemic Risk Centre Financial Markets Group
Subjects:	H Social Sciences > HC Economic History and Conditions H Social Sciences > HJ Public 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:	31 May 2016 12:05
Last Modified:	12 Dec 2024 01:11
Projects:	ES/K002309/1, 11140541, MIPP IS130002
Funders:	Economic and Social Research Council, AXA Research Fund, Fondecyt Project, Instituto Milenio
URI:	http://eprints.lse.ac.uk/id/eprint/66721

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