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Complexity
Volume 2018 (2018), Article ID 4012163, 15 pages
https://doi.org/10.1155/2018/4012163
Research Article

The Application of Macroprudential Capital Requirements in Managing Systemic Risk

Glorious Sun School of Business and Management, Donghua University, Shanghai 200051, China

Correspondence should be addressed to Hong Fan; nc.ude.uhd@nafgnoh

Received 4 July 2017; Revised 15 December 2017; Accepted 21 December 2017; Published 22 January 2018

Academic Editor: Ahmet Sensoy

Copyright © 2018 Hong Fan et al. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

Abstract

When setting banks regulatory capital requirement based on their contribution to the overall risk of the banking system we need to consider that the risk of the banking system as well as each banks risk contribution changes once bank equity capital gets redistributed. Therefore the present paper provides a theoretical framework to manage the systemic risk of the banking system in Nigeria based on macroprudential capital requirements, which requires banks to hold capital that is proportional to their contribution to systemic risk. Using a sample of 10 Nigerian banks, we reallocate capital in the system based on two scenarios; firstly in the situation where the system shocks do not exist in the system, we find that almost all banks appear to hold more capital; secondly, we also consider the situation where the system shocks exist in the system; we find that almost all banks tend to hold little capital on four risk allocation mechanisms. We further find that despite the heterogeneity in macroprudential capital requirements, all risk allocation mechanisms bring a substantial decrease in the systemic risk. The risk allocation mechanism based on ΔCoVaR decreases the average default probability the most. Our results suggest that financial stability can be substantially improved by implementing macroprudential regulations for the banking system.