2023/30 | LEM Working Paper Series | ||||||||||||||||
Systemically important banks - emerging risk and policy responses: An agent-based investigation |
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Lilit Popoyan, Mauro Napoletano and Andrea Roventini |
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Keywords | |||||||||||||||||
Financial instability; monetary policy; macro-prudential policy; systemically important banks, additional loss-absorbing capacity, Basel III regulation; agent-based models.
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JEL Classifications | |||||||||||||||||
C63, E52, E6, G01, G21, G28
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Abstract | |||||||||||||||||
We develop a macroeconomic agent-based model to study the role of systemically important
banks (SIBs) in financial stability and the effectiveness of capital surcharges on SIBs as a risk
management tool. The model is populated by heterogeneous firms, consumers, and banks interacting locally in different markets. In particular, banks provide credit to firms according
to Basel III macro-prudential frameworks and manage their liquidity in the interbank market.
The Central Bank performs monetary policy according to different types of Taylor rules. Our
model endogenously generates banks with different balance sheet sizes, making some systemically important. The additional capital surcharges for SIBs prove to have a marginal effect
on preventing the crisis since it points mainly to the ''too-big-to-fail'' problem with minimal
importance for ''too-interconnected-to-fail'', ''too-many-to-fail'' and other issues. Moreover, we
found that additional capital surcharges on SIBs do not account for the type and management
strategy of the bank, leading to the ''one-size-fits-all'' problem. Finally, we found that additional
loss-absorbing capacity needs to be increased to ensure total coverage of losses for failed SIBs.
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