Modelling and simulating the banking sectors of the US, Germany and the UK

The need to understand the dynamics and after-effects of the recent financial crisis, the evolution of macroprudential surveillance and the introduction of macroprudential regulation all require appropriate macroeconomic models of financial institutions and markets. We present models of the banking systems of the UK, US and Germany integrated into the NiGEM global macroeconomic model. These estimated models permit an evaluation both of the effectiveness of macro-prudential policies and their interaction with monetary and fiscal policy. A key policy implication is to remind us that tightening of regulation is not a free good” but does impact on the economy via the cost of credit. Meanwhile, the impact of macroprudential policies is quite small on the overall economy, suggesting their use in overall macroeconomic stabilisation as a counterpart to monetary policy may be limited although the effect on lending growth and hence potentially in restraining credit booms is more marked. We contend that increasingly active macroprudential policies will make such models as those presented here essential to a correct ongoing calibration and evaluation of policy.