Understanding systemic risk: The trade-offs between capital, short-term funding and liquid asset holdings

Arbeitspapier

We offer a multi-period systemic risk assessment framework with which to assess recent liquidity and capital regulatory requirement proposals in a holistic way. Following Morris and Shin (2009), we introduce funding liquidity risk as an endogenous outcome of the interaction between market liquidity risk, solvency risk, and the funding structure of banks. To assess the overall impact of different mix of capital and liquidity, we simulate the framework under a severe but plausible macro scenario for different balance-sheet structures. Of particular interest, we find that (1) capital has a decreasing marginal effect on systemic risk, (2) increasing capital alone is much less effective in reducing liquidity risk than solvency risk, (3) high liquid asset holdings reduce the marginal effect of increasing short term liability on systemic risk, and (4) changing liquid asset holdings has little effect on systemic risk when short term liability is sufficiently low.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Bank of Canada Working Paper ; No. 2010-29

Classification and Topics

• Classification: Wirtschaft ; Financial Crises ; Banks; Depository Institutions; Micro Finance Institutions; Mortgages ; Statistical Simulation Methods: General ; Methodology for Collecting, Estimating, and Organizing Microeconomic Data; Data Access ; Financial Markets and the Macroeconomy
• Subject: Financial stability ; Financial system regulation and policies ; Finanzmarkt ; Regulierung ; Bankenliquidität ; Gesamtwirtschaftliche Liquidität ; Risiko ; Theorie

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Gauthier, Céline ; He, Zhongfang ; Souissi, Moez
• Event: Veröffentlichung
• (who): Bank of Canada
• (where): Ottawa
• (when): 2010

Further information

• DOI: doi:10.34989/swp-2010-29
• Handle: http://hdl.handle.net/10419/53902
• Last update: 10.03.2025, 11:45 AM CET