Managing systemic risk in the Netherlands

WW Tham, Elvira Sojli, S Liao

Research output: Contribution to journalArticleAcademicpeer-review

11 Citations (Scopus)

Abstract

The paper investigates the effects on systemic risk of macroprudential capital requirements, which require banks to hold capital that is proportional to their contribution to systemic risk. We use a panel of correlated Merton balance sheet models combined with a network clearing algorithm, to measure systemic risk and how it changes with bank capital. The model explicitly incorporates the possibility of default through common exposures to macroeconomic factors and interbank linkages. We use five risk allocation mechanisms to allocate systemic risk to individual banks. Using a sample of Dutch banks, we find that macroprudential capital requirements deviate from the current observed capital levels by as much as 40% and they are positively related to bank size and interbank exposure. Furthermore, macroprudential capital requirements can reduce individual and multiple banks default probabilities by up to 26%. The results suggest that financial stability can be substantially improved by implementing macroprudential regulations for the banking system.
Original languageEnglish
Pages (from-to)231-245
Number of pages15
JournalInternational Review of Economics and Finance
Volume40
Issue numberNovember
DOIs
Publication statusPublished - 11 Mar 2015

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