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FINANCIAL REGULATION AND ENDOGENOUS MACROECONOMIC CRISES

  • Luca Riccetti (a1), Alberto Russo (a2) and Mauro Gallegati (a2)
Abstract

We explore the effects of banking regulation on financial stability and macroeconomic dynamics in an agent-based computational model. In particular, we study the minimum level of capital and the lending concentration towards a single counterpart. We show that an overly tight regulation is dangerous because it reduces credit availability. By contrast, overly loose constraints, associated with a high payout ratio, increase financial fragility that, in turn, damage the real economy. Simulation results support the introduction of regulatory rules aimed at assuring an adequate capitalization of banks, such as the Capital Conservation Buffer (Basel III reform).

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Corresponding author
Address correspondence to: Alberto Russo, Department of Management, Università Politecnica delle Marche, Piazzale Martelli 8, 60121 Ancona (Italy); e-mail: alberto.russo@univpm.it.
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We are grateful for helpful comments and useful suggestions to participants in the “2nd Macro Banking and Finance Workshop” (organized at Università degli Studi di Roma “Tor Vergata,” September 18–19th 2014), to participants in the IWcee14—“International Workshop on Computational Economics and Econometrics” (Roma, June 26–27th 2014), to participants in the “XXI International Conference on Money, Banking and Finance” (organized at Luiss Università Guido Carli, Roma, December 10–11th 2012, where an earlier version of the paper was presented), and to Maria Giovanna Siena. Authors acknowledge the financial support from the European Community Seventh Framework Programme (FP7) under Socio-economic Sciences and Humanities, grant agreement no. FP7-ICT-255987 (FOC-II), grant agreement no. FP7-ICT-611875 (SYMPHONY), and Sapienza Università di Roma for the research project on Agent-based models for representing the interaction between the real economy and finance. Last but not least, we would like to thank two anonymous referees for constructive critics and valuable suggestions. The usual disclaimer applies.

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Macroeconomic Dynamics
  • ISSN: 1365-1005
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