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The impact of Basel III on financial (in)stability: An agent-based credit network approach

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  • Krug, Sebastian
  • Lengnick, Matthias
  • Wohltmann, Hans-Werner

Abstract

The Basel III accord reacts to the events of the recent financial crisis with a combination of revised micro- and new macroprudential regulatory instruments to address various dimensions of systemic risk. This approach of cumulating requirements bears the risk of individual measures negating or even conflicting with each other which might lessen their desired effects on financial stability. We provide an analysis of the impact of Basel III's main components on financial stability in a stock-flow consistent (SFC) agent-based computational economic (ACE) model. We find that the positive joint impact of the microprudential instruments is considerably larger than the sum of the individual contributions to stability, i.e. the standalone impacts are non-additive. However, except for the buffers, the macroprudential overlay's impact is either marginal or even destabilizing. Despite its simplicity, the leverage ratio performs poorly especially when associated drawbacks are explicitly taken into account. Surcharges on SIBs seem to rather contribute to financial regulations complexity than to the resilience of the system.

Suggested Citation

  • Krug, Sebastian & Lengnick, Matthias & Wohltmann, Hans-Werner, 2014. "The impact of Basel III on financial (in)stability: An agent-based credit network approach," Economics Working Papers 2014-13, Christian-Albrechts-University of Kiel, Department of Economics.
    • Handle: RePEc:zbw:cauewp:201413
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    More about this item

    Keywords

    Banking Supervision; Basel III; Liquidity Coverage Ratio; Macroprudential Regulation; Financial Instability; Agent-based Computational Economics;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques

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