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Capital and resolution policies: The US interbank market
Institution:1. Industrial Engineering and Operations Research Department, Columbia University, 500 W. 120th St., Mudd 510, New York, NY 10027, United States;2. Federal Reserve Bank of Cleveland, 1455 E 6th Street, Cleveland, OH 44114, United States;3. Weatherhead School of Management, Case Western Reserve University, 11119 Bellflower Road, Cleveland, OH 44106, United States;1. Borsa Istanbul, Research & Business Development Department, 34467 Emirgan, Istanbul, Turkey;2. Odeabank, Strategic Planning Department, 34394 Sisli, Istanbul, Turkey;3. Abdullah Gul University, Department of Business Administration, 38080 Kayseri, Turkey;4. CNPq Foundation, Brasilia, DF, Brazil;5. Department of Economics, Universidade Catolica de Brasilia, SGAN 916, Modulo B Avenida W5, CEP 70790-160 Brasilia, DF, Brazil;1. Fundação Getulio Vargas–EAESP, Av. Nove de Julho 2029, Bela Vista, 01313-902, Sao Paulo, SP, Brazil;2. Depep, Banco Central do Brasil and Fundação Escola de Comércio Álvares Penteado (Fecap), Brazil;1. School of Mathematical Sciences, University of Science and Technology of China, Hefei, Anhui Province 230026, China;2. Department of Industrial Engineering and Operations Research, Columbia University, New York, NY 10027, United States;1. University of Groningen, Faculty of Economics and Business, P.O. Box 800, 9700 AV Groningen, The Netherlands;2. Frankfurt School of Finance and Management, Sonnemannstraße 9–11, 60314 Frankfurt a.M., Germany;3. Otto-von-Guericke University, Universitätsplatz 2, P.O. Box 4120, 39114 Magdeburg, Germany;4. Halle Institute for Economic Research (IWH), P.O. Box 110361, 06017 Halle, Germany
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.
Keywords:Bank resolution  Capital policy  Systemic risk  Policy simulation  Collateralized interbank market
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