Chair of Innovation, Competition Policy and New Institutional Economics

2014-13

Number
2014-13
Authors
Sebastian Krug, Matthias Lengnick, Hans-Werner Wohltmann
Title
The Impact of Basel III on Financial (In)stability - An Agent-based Credit Network Approach
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.

Keywords: Banking Supervision, Basel III, Liquidity Coverage Ratio, Macroprudential Regulation, Financial Instability, Agent-based Computational Economics

JEL classification: G01, G28, E40, C63
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