The effect of capital requirements on the interconnectedness and systemic risk

Financial Institutions play a significant role in the financial world. Hence,regulations have to be set in order to ensure global financial stability.Capital requirements are a tool to keep banking industry solvent. Introduc-tion to higher capital requirements can ensure that financial institutionskeep enough equity in their balance sheets, given the underlying risk ontheir portfolios. However, micro-prudential capital requirements can makebanking industry more interconnected and consequently more fragile. Inthis paper, I find that higher micro-prudential capital requirements canlead to higher interconnectedness and systemic risk in the banking indus-try. Conversely, my results indicate that tighter macro prudential-capitalrequirements can decrease the interconnectedness and systemic risk withinthe banking sector.