Systemic capital requirements for Nordic banks

Maintaining nancial stability in the economy requires sucient capitalization of the banking sector. Due to the interconnectedness and correlated banks' exposures the prob- ability of banks' defaults can be highly amplied in times of economic distress. Therefore, these two factors should be taken into account when setting capital requirements for banks. This paper uses the interbank network construction techniques and the structural credit risk modelling approach within the constrained optimization problem to nd optimal sys- temic capital requirements for the largest banks in the Nordic-Baltic region. Based on the papers by Elsinger et al. (2006) and Webber and Willison (2011), it provides the mapping from the estimated risk levels to the capital surcharges required for keeping systemic risks within tolerable limits. The resulting quantication of the systemic capital requirements can either serve as the supporting indicator for the central bankers for setting banks' capital buers or the indicator of the stance of the individual bank's riskiness after taking its systemic importance into account.