Centrality-based Capital Allocations

We look at the effect of capital rules on a banking system that is connected throughcorrelated credit exposures and interbank lending. The rules, which combine individualbank characteristics and interconnectivity measures of interbank lending, are to minimizea measure of system-wide losses. Using the detailed German Credit Register forestimation, we find capital rules based on eigenvectors to dominate any other centralitymeasure, followed by closeness. Compared to the baseline case, capital reallocation basedon the Adjacency Eigenvector saves about 15% in system losses as measured by expectedbankruptcy costs.