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Can We Prove a Bank Guilty of Creating Systemic Risk? A Minority Report
Author(s) -
DANIELSSON JON,
JAMES KEVIN R.,
VALENZUELA MARCELA,
ZER ILKNUR
Publication year - 2016
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12318
Subject(s) - systemic risk , capital punishment , capital (architecture) , financial stability , identification (biology) , foundation (evidence) , capital requirement , punishment (psychology) , actuarial science , business , bank regulation , economics , financial crisis , financial system , microeconomics , political science , incentive , law , psychology , macroeconomics , history , social psychology , botany , archaeology , biology
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.