Basel III capital surcharges for G-SIBs fail to control systemic risk and can cause pro-cyclical side effects

Sebastian Poledna, Olaf Bochmann and Stefan Thurner

Papers from arXiv.org

Abstract: In addition to constraining bilateral exposures of financial institutions, there are essentially two options for future financial regulation of systemic risk (SR): First, financial regulation could attempt to reduce the financial fragility of global or domestic systemically important financial institutions (G-SIBs or D-SIBs), as for instance proposed in Basel III. Second, future financial regulation could attempt strengthening the financial system as a whole. This can be achieved by re-shaping the topology of financial networks. We use an agent-based model (ABM) of a financial system and the real economy to study and compare the consequences of these two options. By conducting three "computer experiments" with the ABM we find that re-shaping financial networks is more effective and efficient than reducing leverage. Capital surcharges for G-SIBs can reduce SR, but must be larger than those specified in Basel III in order to have a measurable impact. This can cause a loss of efficiency. Basel III capital surcharges for G-SIBs can have pro-cyclical side effects.

Date: 2016-02
New Economics Papers: this item is included in nep-cba, nep-cmp and nep-rmg
References: Add references at CitEc
Citations:

Downloads: (external link)
http://arxiv.org/pdf/1602.03505 Latest version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1602.03505

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().