City Research Online

Abstract

We present a new agent-based model focusing on the linkage between the interbank market and the real economy with a stylised central bank acting as lender of last resort. Using this model we address the tradeoff between stability and economic performance for different structures of the interbank market. We also explore the efficacy of recent regulatory reforms using our richer model. Our results suggest that the effects of regulatory leverage ratios on the banking sector's performance can vary in a complex and non-monotonic way with the state of the economy, the degree of connectivity of the interbank market and the amount of information available to market participants on bank risks.

Publication Type:	Article
Additional Information:	NOTICE: this is the author’s version of a work that was accepted for publication in Journal of Economic Dynamics and Control. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Journal of Economic Dynamics and Control, July 2014, http://dx.doi.org/10.1016/j.jedc.2014.07.002. Article in press.
Publisher Keywords:	Financial Regulation, Bank Lending, Systemic Risk
Subjects:	H Social Sciences > HB Economic Theory
Departments:	School of Policy & Global Affairs > Economics
SWORD Depositor:	Symplectic Administrator

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