PAUL JOHNSON
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Only Paul Could Go To Changchun

A Microfounded Design of Interconnectedness-Based Macroprudential Policy

3/21/2016

 
Here.

I develop a microfounded design of capital surcharges that target the interconnectedness component of systemic risk. These surcharges increase the costs of establishing interbank connections, which leads to a non-monotonic welfare effect. While reduced interconnectedness decreases welfare by restricting the ability of banks to insure against liquidity shocks, it also increases it by reducing contagion when an interconnected bank fails. Thus, the regulator faces a trade-off between efficiency and financial stability. 

From:

José Fique
​Financial Stability Department Bank of Canada


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