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Credit creation under multiple banking regulations: The impact of balance sheet diversity on money supply

Xiaoyun Xing, Mingsong Wang, Yougui Wang and H. Eugene Stanley

Economic Modelling, 2020, vol. 91, issue C, 720-735

Abstract: Since the recent financial crisis along with more concentration of banking supervision, we have stepped into a new regulatory regime where multiple regulations are at play simultaneously. In this paper, we study the collective impacts of multiple regulations on credit creation in a heterogeneous banking system. Each single regulation imposes a constraint on credit creation for each bank, while with multiple regulations, only the most stringent one plays the determinant role on money supply. For the homogeneous banking system with identical balance sheets, they share the same binding regulation. In contrast, for the heterogeneous banking system with diverse balance sheets, the binding regulation for each bank may be different from other's. Those banks, who are bound by different regulatory constraints from homogeneous banks, would bring about an overall reduction in money supply, because those binding regulations impose a lower capacity (compared with the one in the case of homogeneous banks) for the banks to extend their balance sheets in this condition. We put forward an agent-based model of commercial banks integrated with two processes: credit creation and fund transfer, to demonstrate the reduction effect. The results facilitate the understandings of the transmission mechanism of monetary policy via banks and its interaction with prudential regulations.

Keywords: Money supply; Credit creation; Prudential regulation; Bank heterogeneity; Balance sheet approach (search for similar items in EconPapers)
JEL-codes: C63 E47 E51 G28 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.econmod.2019.09.030

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