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Capital and resolution policies: The US interbank market

Author

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  • Capponi, Agostino
  • Dooley, John M.
  • Oet, Mikhail V.
  • Ong, Stephen J.

Abstract

We develop an empirically based simulation study to test two types of policies designed to control systemic risk: preventive policies targeting capital requirements and mitigation policies targeting default resolution. We find that capital buffers reduce both the number of defaults and the resulting losses. The loss reduction benefit increases as the magnitude of adverse shocks becomes higher. We find that a simple branch-breakup resolution strategy reduces the loss borne by the Federal Deposit Insurance Corporation (FDIC). The mitigation effect becomes higher as the fraction of assets resolved through auctions and auction competitiveness increase.

Suggested Citation

  • Capponi, Agostino & Dooley, John M. & Oet, Mikhail V. & Ong, Stephen J., 2017. "Capital and resolution policies: The US interbank market," Journal of Financial Stability, Elsevier, vol. 30(C), pages 229-239.
    • Handle: RePEc:eee:finsta:v:30:y:2017:i:c:p:229-239
    DOI: 10.1016/j.jfs.2016.04.010
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    2. Morteza Alaeddini & Philippe Madiès & Paul J. Reaidy & Julie Dugdale, 2023. "Interbank money market concerns and actors’ strategies—A systematic review of 21st century literature," Journal of Economic Surveys, Wiley Blackwell, vol. 37(2), pages 573-654, April.

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    More about this item

    Keywords

    Bank resolution; Capital policy; Systemic risk; Policy simulation; Collateralized interbank market;
    All these keywords.

    JEL classification:

    • C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General
    • C79 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Other
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation

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