When regulating banks based on their contribution to the overall risk of the banking system we have to consider that the risk of the banking system as well as each bank's risk contribution changes once bank equity capital gets reallocated. We define macroprudential capital requirements as the...

In the aftermath of the financial crisis, there is interest in reforming bank regulation such that capital requirements are more closely linked to a bank's contribution to the overall risk of the financial system. In our paper we compare alternative mechanisms for allocating the overall risk of...