An Application of Macroprudential Capital Requirements in Sweden

Sammanfattning: The adverse effects of the recent financial crisis have highlighted the need to reform bank regulation. In this paper we investigate the suitability of capital requirements based on measures that account for systemic risk. We analyse the effects that such requirements would have had historically for the Swedish banking system, had they been employed, using a network based structural model of the banking system and simulated credit portfolio losses. We analyse the potential efficiency gains that reallocation of capital across banks within the Swedish banking system could have by looking at the individual probabilities of default and the unconditional expected losses given default. The analysis builds on detailed data on the four largest banks in Sweden, focusing on four points in time; Q4 2012, Q2 2009, Q2 2007 and Q1 2005. Based on our analysis we conclude that optimal systemic capital allocations differ substantially from current. Further, by applying macroprudential capital requirements individual probabilities of default can be decreased by approximately 10% in Q4 2012, but even more in periods when the crisis was more prominent. Perhaps most important is that the risk of a systemic crisis, with more than three banks defaulting simultaneously, can be decreased by 37% and expected losses almost halved.