The Effects of Prudential Supervision on Bank Resiliency and Profits in a Multi-Agent Setting

Alexandru Monahov

No 2015-24, GREDEG Working Papers from Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), Université Côte d'Azur, France

Abstract: This article studies the effects of prudential supervision on bank resiliency and profitability within an agent-based framework that allows us to simulate persistent crisis conditions. It focuses on the stabilizing effect of prudential supervision introduced alongside three "traditional" regulatory instruments: a norm, a market-based CDS insurance mechanism and a tax in the form of a bail-in instrument. The results show that: (i) supervision enhances the regulatory instruments’ efficiency, (ii) the regulatory norm can postpone the bank’s default, but not avoid it, (iii) the CDS mechanism only produces positive results on resiliency and profitability if the regulator supervises, and (iv) the tax bail-in instrument is the most powerful tool in the regulator’s arsenal as it potentiates profitable bank operation under long-lasting crisis conditions.

Keywords: Prudential supervision; Banking system supervision; Financial institution regulation; Agent Based Modeling; Multi-Agent Simulation (search for similar items in EconPapers)
JEL-codes: C63 E65 G28 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2015-06
New Economics Papers: this item is included in nep-ban, nep-cba and nep-cmp
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