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Working Paper

Centrality-based Capital Allocations

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This paper looks at the effect of capital rules on a banking system that is connected through correlated credit exposures and interbank lending. Keeping total capital in the system constant, the reallocation rules, which combine individual bank characteristics and interconnectivity measures of interbank lending, are to minimize a measure of systemwide losses. Using the detailed German Credit Register for estimation, we find that capital rules based on eigenvectors dominate any other centrality measure, saving about 15 percent in expected bankruptcy costs.
Topics
Bank policy and regulation
Financial networks
01.29.2015ISSN 2573-7953 WP 15-01DOI 10.26509/frbc-wp-201501
Keywords interbank connectivity, credit exposures, capital requirements, bankingsystem, bank contagion, network centrality measure, bankruptcy costs,systemic risk
JEL Classification Codes G21, G28, C15, C81

Working Papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded official Federal Reserve Bank of Cleveland publications. The views expressed in this paper are those of the authors and do not represent the views of the Federal Reserve Bank of Cleveland or the Federal Reserve System.

Suggested Citation

Alter, Adrian, Ben R. Craig, and Peter Raupach. 2015. “Centrality-based Capital Allocations.” Federal Reserve Bank of Cleveland, Working Paper No. 15-01. https://doi.org/10.26509/frbc-wp-201501