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Too-big-to-fail Reforms and Systemic Risk

February 26, 2021
Kakuho Furukawa*1
Hibiki Ichiue*2
Yugo Kimura*3
Noriyuki Shiraki*4

Abstract

We examine the effects of too-big-to-fail reforms using Delta-CoVaR and SRISK. Developments in these market-based systemic risk measures suggest that the reforms have led to a larger decline in the systemic risk contribution of global systemically important banks (G-SIBs) than of other banks. The systemic risk measures also suggest that the larger the systemic risk associated with a G-SIB, the more the reforms have led to a decline in its systemic risk. These findings are consistent with the objectives of the reforms and are validated by statistical analyses, including quantile panel regressions. We also highlight the importance of using data for a subset of financial institutions to adjust for the increase in data coverage when using popular estimates of SRISK. Furthermore, SRISK may overestimate systemic risk in recent years by ignoring the role of total loss absorbing capacity (TLAC)-eligible bonds.

Keywords
Too Big to Fail, Systemic Risk, Financial Regulations, CoVaR, SRISK

JEL Classification
G21, G23, G28

The authors thank staff members of the Bank of Japan and members of the Financial Stability Board's evaluation working group on the effects of too-big-to-fail reforms, in particular Claudia Buch, Simon Firestone, and Nellie Liang, for their valuable comments. We are also grateful to Naohisa Hirakata and his coauthors for sharing the code to compute Delta-CoVaR. All remaining errors are our own. The views expressed in this paper are those of the authors and do not necessarily reflect the official views of the Bank of Japan.

  1. *1Financial System and Bank Examination Department, Bank of Japan
    E-mail : kakuho.furukawa@boj.or.jp
  2. *2Financial System and Bank Examination Department (currently at the Naha Branch), Bank of Japan
    E-mail : hibiki.ichiue@boj.or.jp
  3. *3Financial System and Bank Examination Department (currently at the Personnel and Corporate Affairs Department), Bank of Japan
    E-mail : yuugo.kimura@boj.or.jp
  4. *4Financial System and Bank Examination Department, Bank of Japan
    E-mail : noriyuki.shiraki@boj.or.jp

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