Capital and Resolution Policies: The US Interbank Market

35 Pages Posted: 1 Sep 2014 Last revised: 24 Apr 2016

See all articles by Agostino Capponi

Agostino Capponi

Columbia University

John Dooley

Federal Reserve Banks - Federal Reserve Bank of Cleveland

Mikhail V. Oet

Case Western Reserve University - Weatherhead School of Management; Federal Reserve Banks - Federal Reserve Bank of Cleveland

Stephen J. Ong

Federal Reserve Banks - Federal Reserve Bank of Cleveland

Date Written: April 22, 2016

Abstract

We develop an empirically-based simulation study to test policies designed to control systemic risk. We consider preventive policies targeting capital requirements and mitigation policies targeting default resolution. We find that capital buffers reduce both defaults and losses. The loss reduction benefit resulting from capital buffers increases as the magnitude of adverse shocks becomes higher. We test a simple branch breakup resolution strategy which 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 increases.

Keywords: policies, countercyclical buffers, default resolution, interbank market, simulation

JEL Classification: C30, C38, C52, E44, G10, G21, L14

Suggested Citation

Capponi, Agostino and Dooley, John and Oet, Mikhail V. and Ong, Stephen J., Capital and Resolution Policies: The US Interbank Market (April 22, 2016). Journal of Financial Stability, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2489503

Agostino Capponi

Columbia University ( email )

S. W. Mudd Building
New York, NY 10027
United States

John Dooley

Federal Reserve Banks - Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States

Mikhail V. Oet (Contact Author)

Case Western Reserve University - Weatherhead School of Management ( email )

364 PBL Building
Cleveland, OH 44106
United States

Federal Reserve Banks - Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States
216.774.2684 (Phone)
216.579.2932 (Fax)

Stephen J. Ong

Federal Reserve Banks - Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States

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