Macroprudential capital buffers in heterogeneous banking networks: insights from an ABM with liquidity crises

Andrea Gurgone and Giulia Iori

The European Journal of Finance, 2022, vol. 28, issue 13-15, 1399-1445

Abstract: 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 networks; it is preferable applying 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.

Date: 2022
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DOI: 10.1080/1351847X.2021.1976664

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