Autor: Carlevaro Emiliano A.
Institución: University of Adelaide
JEL: E44, C21
Capital regulation on banks aims to reduce the probability of failures. In theory, the effect of capital buffers in preventing failures could depend on the linkages among financial institutions. These linkages are nevertheless usually omitted in empirical models. I study the effectiveness of capital regulation in preventing failures using a spatial autoregressive probit model, which accommodates links among banks and feedback effects. I study the Argentinian banking crisis of 2001 for which I build the complete interbank network. By allowing linkages between banks, estimates from the spatial model show that capital regulation is 50% less effective than estimates of a model in which banks are not interconnected.