This paper examines the impact of imposing capital requirements on systemic risk. We use a static model on financial institutions' risk-taking behavior to quantify the systemic risk in the cross-sectional dimension in both regulated and unregulated systems. Although imposing a capital requirement can lower individual risk, it simultaneously enhances systemic linkage within the system. By using a proper systemic risk measure combining both individual risk and systemic linkage, we show that systemic risk in a regulated system can be higher than that in an unregulated system. In addition, we analyze a sufficient condition under which the systemic risk in a regulated system is always lower.

Additional Metadata
Keywords Capital requirement, Systemic risk, macro-prudential regulation
Persistent URL dx.doi.org/10.1016/j.jfs.2013.06.002, hdl.handle.net/1765/41556
Journal Journal of Financial Stability
Citation
Zhou, C. (2013). The impact of imposing capital requirements on systemic risk. Journal of Financial Stability, 9(3), 320–329. doi:10.1016/j.jfs.2013.06.002