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.

Eisert, T.
Economics of Management and Organisation
Erasmus School of Economics

Karikis, V. (2020, May 28). The effect of capital requirements on the interconnectedness and systemic risk. Economics of Management and Organisation. Retrieved from