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Growth and collapse: an agent-based banking model of endogenous leverage cycles and financial contagion

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  • Robert De Caux
  • Frank McGroarty
  • Markus Brede

Abstract

We create an agent-based banking model that allows the simulation of leverage cycles and financial contagion. Banks adapt their investment strategies in an evolutionary manner according to the success of their competitors, creating an endogenous loan network and a dynamic asset market. This system exhibits periods of slow risk growth and fast insolvency cascades. We show how the susceptibility of banks to insolvency and contagion over the long term depends on asset price volatility, as well as demonstrating an interdependency between asset and liability-side contagion channels. Our model provides a suitable framework for performing further policy tests.

Suggested Citation

  • Robert De Caux & Frank McGroarty & Markus Brede, 2018. "Growth and collapse: an agent-based banking model of endogenous leverage cycles and financial contagion," International Journal of Computational Economics and Econometrics, Inderscience Enterprises Ltd, vol. 8(3/4), pages 370-387.
    • Handle: RePEc:ids:ijcome:v:8:y:2018:i:3/4:p:370-387
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