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Global Banking$
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Roy C. Smith, Ingo Walter, and Gayle DeLong

Print publication date: 2012

Print ISBN-13: 9780195335934

Published to Oxford Scholarship Online: May 2012

DOI: 10.1093/acprof:oso/9780195335934.001.0001

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Systemic Risk in Global Banking

Systemic Risk in Global Banking

Chapter:
(p.337) Chapter 14 Systemic Risk in Global Banking
Source:
Global Banking
Author(s):

Roy C. Smith

Ingo Walter

Gayle Delong

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780195335934.003.0014

This chapter discusses essential regulatory principles for controlling systemic risk: Systemic financial intermediaries like large and complex financial institutions (LCFIs), which are thought to be too big to fail, must be charged insurance premiums commensurate with the explicit or implicit government insurance they enjoy on a continuous basis. There should be an additional risk premium tied specifically to the systemic risk of the institutions, for example, if it exceeds a normative level, the institution pays for the additional risk taken on. Some sort of after-the-fact discipline such as “contingent capital” may be necessary; for example, debt that automatically converts into equity when losses seriously deplete equity capital. A form of functional separation or carve-outs needs to be enforced, whether by regulatory fiat or through appropriate capital charges.

Keywords:   contingent capital, large and complex financial organizations, risk premium, systemic risk

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