Paolo Siciliani, Nic Garbarino, Thomas Papavranoussis and Jonathan Stalmann.
Systemically important banks are material providers of critical economic functions. The Global Financial Crisis showed how distress or failure of one of these firms may have a severe impact on the financial system and the real economy. Systemic capital surcharges protect the economy from these negative spillovers by decreasing systemically important firms’ probability of distress or failure. A graduated approach facilitates effective competition to the extent that the capital surcharges faced by firms are more proportionate to the scale of systemic risks that they pose. This post illustrates some of the competition implications with respect to the methodology used to set the number and level of thresholds.