Systemic surcharges and measures of systemic importance

Abstract

PurposeThere is an emerging consensus that systemically important banks should face stricter regulations and systemic surcharges. To make this latter principle operational the regulator will need to quantify the systemic importance of individual banks. The purpose of this paper is to review the proposed measures of systemic importance from the research community and discuss their merits relative to how a regulator would ideally wish to calibrate surcharges on systemically important banks, and to evaluate how useful proposed measures of the systemic importance of financial institutions will be to regulators.Design/methodology/approachThe author reviews the main contributions to the research literature and discusses their relevance for the problem faced by regulators.FindingsThere are five main caveats that make the proposed measures of systemic importance less useful for regulators.Practical implicationsThe proposed measures may help identify relevant aspects of systemic importance, but the regulators will need to construct their own measures for practical use.Originality/valueThe paper provides a critical review of a research literature that could potentially have large practical implications.