Measuring and Charging for Banks' Systemic Interconnectedness

Generalized calls for more and higher quality capital for systemic institutions were the first natural reaction to the recent global financial crisis. Although the introduction of systemic risk-based capital surcharges is a proposal that has gained acceptance, its design still faces important challenges—including how to measure systemic risk, avoid the surcharges’ procyclicality, and cross-border coordination. This chapter contributes to the debate on the merits and operationalization of systemic risk-based capital surcharges by presenting two methodologies for computing surcharges based on an institution’s contribution to systemic risk. The chapter also illustrates ways to lessen their procyclicality. The authors conclude discussing practical cross-border, data, and communication issues for an effective implementation of systemic capital surcharges.