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Macroprudential Capital Buyers in Heterogeneous Banking Networks: Insights from an ABM with Liquidity Crises

Gurgone, A. and Iori, G. ORCID: 0000-0001-9443-9353 (2021). Macroprudential Capital Buyers in Heterogeneous Banking Networks: Insights from an ABM with Liquidity Crises. The European Journal of Finance,

Abstract

In this paper, we study how the effectiveness of macroprudential capital buffers conditional to the systemic-risk assessment of banks responds to the degree of heterogeneity of the financial system. A multi-agent model is employed to build an artificial economy with households, firms, and banks where occasional liquidity crises emerge. The systemic importance of banks is captured by a score-based mechanism reflecting banks' characteristics in terms of size or interconnectedness. We compare three degrees of heterogeneity in the configuration of financial networks related to different banking concentrations in the loan market. The main findings suggest that: (i) reducing the heterogeneity of the banking network stabilizes the economy by itself; (ii) the identification criteria of systemic-important institutions are affected by the heterogeneity of financial networks; it is preferable to apply systemic capital surcharges to the largest banks under high heterogeneity and targeting those most interconnected under low heterogeneity; (iii) the effectiveness of systemic capital buffers is preserved under high heterogeneity when a common asset holding contagion channel is added. However, simple measures based on risk-weighted assets capital ratios appear to be more effective in low heterogeneous systems. Thus, we argue that prudential regulation should account for the characteristics of the banking networks and tune macroprudential tools accordingly.

Publication Type: Article
Additional Information: This is an Accepted Manuscript version of the following article, accepted for publication in European Journal of Finance. Gurgone, A. and Iori, G. (2021). Macroprudential Capital Bu ers in Heterogeneous Banking Networks: Insights from an ABM with Liquidity Crises. The European Journal of Finance. It is deposited under the terms of the Creative Commons Attribution-NonCommercial License (http://creativecommons.org/licenses/by-nc/4.0/), which permits non-commercial re-use, distribution, and reproduction in any medium, provided the original work is properly cited.
Publisher Keywords: agent-based model, capital requirements, capital buffers, financial networks, macroprudential policy, systemic risk
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
Departments: School of Arts & Social Sciences > Economics
Date available in CRO: 31 Aug 2021 13:53
Date deposited: 31 August 2021
Date of acceptance: 31 August 2021
URI: https://openaccess.city.ac.uk/id/eprint/26681
[img] Text - Accepted Version
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