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

Danielsson, Jon, 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). pp. 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:	http://onlinelibrary.wiley.com/journal/10.1111/(IS...
Additional Information:	© 2016 The Ohio State University
Library of Congress subject classification:	H Social Sciences > HC Economic History and Conditions H Social Sciences > HJ Public Finance
Sets:	Departments > Finance Research centres and groups > Systemic Risk Centre Research centres and groups > Financial Markets Group (FMG)
Project and Funder Information:	Project ID Funder Name Funder ID ES/K002309/1 Economic and Social Research Council http://dx.doi.org/10.13039/501100000269 UNSPECIFIED AXA Research Fund http://dx.doi.org/10.13039/501100001961 11140541 Fondecyt Project UNSPECIFIED MIPP IS130002 Instituto Milenio UNSPECIFIED
Date Deposited:	31 May 2016 12:05
URL:	http://eprints.lse.ac.uk/66721/

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