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Autonomously Interacting Banks

Author

Listed:
  • Lengwiler, Yvan

    () (University of Basel)

  • Maringer, Dietmar

    () (University of Basel)

Abstract

The great financial turmoil that started 2007 has brought bank regulation back into the political debate. There is talk about imposing new regulations on banks and other financial intermediaries. Yet, we are not convinced that it is completely understood how the existing regulation affects systemic stability, let alone what the effect of new proposed rules would be.In order to better understand these issues, we study the interaction of heterogeneous financial agents in a market that features several properties we believe to be realistic. Our agents develop heterogeneous views about the correct valuation of a risky asset. Some agents (banks) operate with substantial leverage and thus bankruptcy is a possibility. Agents may engage in fire sales, either because they face real financial trouble, or because they are forced to by regulation. Moreover, through their trading activities, agents exert externalities on each other’s balance sheets due to mark-to-market. Through this mechanism, fire sales can lead to contagion, and one failing bank can cause several more to follow suit.

Suggested Citation

  • Lengwiler, Yvan & Maringer, Dietmar, 2011. "Autonomously Interacting Banks," Working papers 2011/07, Faculty of Business and Economics - University of Basel.
  • Handle: RePEc:bsl:wpaper:2011/07
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    File URL: https://edoc.unibas.ch/22535/1/Interacting-Banks_01.pdf
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    References listed on IDEAS

    as
    1. John Kambhu & Til Schuermann & Kevin J. Stiroh, 2007. "Hedge funds, financial intermediation, and systemic risk," Economic Policy Review, Federal Reserve Bank of New York, issue Dec, pages 1-18.
    2. Martin Hellwig, 2009. "Systemic Risk in the Financial Sector: An Analysis of the Subprime-Mortgage Financial Crisis," De Economist, Springer, vol. 157(2), pages 129-207, June.
    3. repec:fip:fedgsq:y:2005:i:mar10 is not listed on IDEAS
    4. Alan Kirman, 1993. "Ants, Rationality, and Recruitment," The Quarterly Journal of Economics, Oxford University Press, vol. 108(1), pages 137-156.
    5. Kashyap, Anil K. & Rajan, Raghuram G. & Stein, Jeremy C., 2008. "Rethinking capital regulation," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 431-471.
    6. Ben S. Bernanke, 2005. "The global saving glut and the U.S. current account deficit," Speech 77, Board of Governors of the Federal Reserve System (U.S.).
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    bank regulation; BIS capital adequacy requirements; Basel II; Basel III; leverage ratio; default rate; systemic stability; fire sales; contagion; autonomous agents; simulation;

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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