The impact of Basel III on financial (in)stability: An agent-based credit network approach

Sebastian Krug (), Matthias Lengnick and Hans-Werner Wohltmann

No 2014-13, Economics Working Papers from Christian-Albrechts-University of Kiel, Department of Economics

Abstract: The Basel III accord reacts to the events of the recent financial crisis with a combination of revised micro- and new macroprudential regulatory instruments to address various dimensions of systemic risk. This approach of cumulating requirements bears the risk of individual measures negating or even conflicting with each other which might lessen their desired effects on financial stability. We provide an analysis of the impact of Basel III's main components on financial stability in a stock-flow consistent (SFC) agent-based computational economic (ACE) model. We find that the positive joint impact of the microprudential instruments is considerably larger than the sum of the individual contributions to stability, i.e. the standalone impacts are non-additive. However, except for the buffers, the macroprudential overlay's impact is either marginal or even destabilizing. Despite its simplicity, the leverage ratio performs poorly especially when associated drawbacks are explicitly taken into account. Surcharges on SIBs seem to rather contribute to financial regulations complexity than to the resilience of the system.

Keywords: Banking Supervision; Basel III; Liquidity Coverage Ratio; Macroprudential Regulation; Financial Instability; Agent-based Computational Economics (search for similar items in EconPapers)
JEL-codes: C63 E40 G01 G28 (search for similar items in EconPapers)
Date: 2014
New Economics Papers: this item is included in nep-cba, nep-cmp, nep-fmk and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (39)

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Journal Article: The impact of Basel III on financial (in)stability: an agent-based credit network approach (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:cauewp:201413

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