Centrality-Based Capital Allocations
by Adrian Altera, Ben R. Craigb, c and Peter Raupachb
We look 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 system-wide 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.
JEL Codes: G21, G28, C15, C81.
Full article (PDF, 49 pages, 963 kb)
Discussion by Alireza Tahbaz-Salehi
a International Monetary Fund
b Deutsche Bundesbank
c Federal Reserve Bank of Cleveland