Skip to main content


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

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).

Corresponding author
Address correspondence to: Alberto Russo, Department of Management, Università Politecnica delle Marche, Piazzale Martelli 8, 60121 Ancona (Italy); e-mail:
Hide All

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.

Hide All
Acharya, V.V., Gujral, I., Kulkarni, N., and Shin, H.S. (2011) Dividends and Bank Capital in the Financial Crisis of 2007–2009. NBER working paper 16896, NBER, Cambridge, MA.
Admati, A.R. and Hellwig, M.F. (2013a) The Bankers' New Clothes: What's Wrong with Banking and What to Do about It. Princeton, NJ: Princeton University Press.
Admati, A.R. and Hellwig, M.F. (2013b) Does Debt Discipline Bankers? An Academic Myth About Bank Indebtedness. INET research note 24, Institute for New Economic Thinking.
Adrian, T. and Shin, H.S. (2008) Liquidity, monetary policy and financial cycles. Current Issues in Economics and Finance 14 (1), 17.
Adrian, T. and Shin, H.S. (2009) Money, liquidity, and monetary policy. American Economic Review 99 (2), 600605.
Adrian, T. and Shin, H.S. (2010) Liquidity and leverage. Journal of Financial Intermediation 19 (3), 418437.
Agénor, P.R. and da Silva, L.A. Pereira (2012) Cyclical effects of bank capital requirements with imperfect credit markets. Journal of Financial Stability 8 (1), 4356.
Aghion, P., Angeletos, G.M., Banerjee, A., and Manova, K. (2010) Volatility and growth: Credit constraints and the composition of investment. Journal of Monetary Economics 57 (3), 246265.
Al-Darwish, A., Hafeman, M., Impavido, G., Kemp, M., and O'Malley, P. (2011) Possible Unintended Consequences of Basel III and Solvency II. IMF working papers 11/187, IMF, Washington, DC.
Allen, B., Chan, K.K., Milne, A., and Thomas, S. (2012) Basel III: Is the cure worse than the disease? International Review of Financial Analysis 25 (C), 159166.
Allen, F. and Gale, D. (2000) Financial contagion. Journal of Political Economy 108 (1), 133.
Ashraf, Q., Gershman, B., and Howitt, P. (2016) How inflation affects macroeconomic performance: An agent-based computational investigation. Macroeconomic Dynamics 20 (2), 558581.
Babutsidze, Z. (2012) Asymmetric (s,s) pricing: Implications for monetary policy. Revue de l'OFCE 124, 177204.
Battiston, S., Delli Gatti, D., Gallegati, M., Greenwald, B.C., and Stiglitz, J.E. (2012) Liaisons dangereuses: Increasing connectivity, risk sharing, and systemic risk. Journal of Economic Dynamics & Control 36 (8), 11211141.
BCBS (2010) An assessment of the long-term economic impact of stronger capital and liquidity requirements. August 2010, Bank for International Settlements, Basel, Switzerland.
BCBS (2015) The Interplay of Accounting and Regulation and Its Impact on Bank Behaviour: Literature Review. Working paper 28, Bank for International Settlements, Basel, Switzerland.
Bergmann, B.R. (1974) A microsimulation of the macroeconomy with explicitely represented money flows. Annals of Economic and Social Measurement 3, 475489.
Booth, L., Demirgu-Kunt, V.A. Asli, and Maksimovic, V. (2001) Capital structures in developing countries. Journal of Finance 56 (1), 87130.
Brav, A., Graham, J.R., Harvey, C.R., and Michaely, R. (2005) Payout policy in the 21st century. Journal of Financial Economics 77, 483527.
Brogi, M. (2010) Capital adequacy and dividend policy: Evidence from Italian banks. In Bracchi, G. and Masciandaro, D. (eds.), Le banche italiane sono speciali?, XV Rapporto annuale della Fondazione Rosselli, available at SSRN:
Broner, F.A. and Ventura, J. (2013) Rethinking the Effects of Financial Liberalization. Working paper, Universitat Pompeu Fabra.
Brunnermeier, M.K. and Pedersen, L.H. (2009) Market liquidity and funding liquidity. Review of Financial Studies 22 (6), 22012238.
Carlson, M., Shan, H., and Warusawitharana, M. (2011) Capital Ratios and Bank Lending: A Matched Bank Approach. Finance and Economics Discussion Series 2011–34, Board of Governors of the Federal Reserve System.
Cecchetti, S.G. and Kharroubi, E. (2012) Reassessing the Impact of Finance on Growth. BIS working papers 381, Bank for International Settlements, Basel, Switzerland.
Cincotti, S., Raberto, M., and Teglio, A. (2010) Credit money and macroeconomic instability in the agent-based model and simulator Eurace. Economics - The Open-Access, Open-Assessment E-Journal 4 (26), 132.
Cincotti, S., Raberto, M., and Teglio, A. (2012a) Debt deleveraging and business cycles. An agent-based perspective. Economics - The Open-Access, Open-Assessment E-Journal 6 (27), 149.
Cincotti, S., Raberto, M., and Teglio, A. (2012b) Macroprudential policies in an agent-based artificial economy. Revue de l'OFCE 124, 205234.
Da Silva, M.A. and Lima, G.T. (2015) Combining Monetary Policy and Financial Regulation: An Agent Based Modeling Approach. Working paper 394, Banco Central do Brasil.
Dawid, H., Gemkow, S., Harting, P., van der Hoog, S., and Neugart, M. (2011), Eurace@Unibi Model v1.0 User Manual.
Dawid, H., Gemkow, S., Harting, P., van der Hoog, S., and Neugart, M. (2012). The Eurace@Unibi Model: An Agent-Based Macroeconomic Model for Economic Policy Analysis. Working papers in Economics and Management 05–2015, University of Bielefeld.
Dawid, H., Gemkow, S., Harting, P., van der Hoog, S., and Neugart, M. (2015) Agent-based macroeconomic modeling and policy analysis: The Eurace@Unibi model. In Chen, S.-H. and Kaboudan, M. (eds.), Handbook on Computational Economics and Finance. Bielefeld, Germany: Bielefeld University.
Dawid, H. and Neugart, M. (2011) Agent-based models for economic policy design. Eastern Economic Journal 37 (1), 4450.
DeAngelo, H., DeAngelo, L., and Skinner, D.J. (2004) Are dividends disappearing? Dividend concentration and the consolidation of earnings. Journal of Financial Economics 72, 425456.
Delli Gatti, D., Gaffeo, E., and Gallegati, M. (2005) The apprentice wizard: monetary policy, complexity and learning. New Mathematics and Natural Computation 1 (1), 109128.
DelliGatti, D. Gatti, D., Gallegati, M., Greenwald, B., Russo, A., and Stiglitz, J.E. (2009) Business fluctuations and bankruptcy avalanches in an evolving network economy. Journal of Economic Interaction and Coordination 4 (2), 195212.
DelliGatti, D. Gatti, D., Gallegati, M., Greenwald, B., Russo, A., and Stiglitz, J.E. (2010) The financial accelerator in an evolving credit network. Journal of Economic Dynamics and Control 34 (9), 16271650.
Denis, D.J. and Osobov, I. (2008) Why do firms pay dividends? International evidence on the determinants of dividend policy. Journal of Financial Economics 89, 6282.
De Walque, G., Pierrard, O., and Rouabah, A. (2010) Financial (in)stability, supervision and liquidity injections: A dynamic general equilibrium approach. The Economic Journal 120, 12341261.
Diamond, D.W. and Rajan, R. (2000) A theory of bank capital. Journal of Finance 55 (6), 24312465.
Donaldson, G. (1961) Corporate Debt Capacity: A Study of Corporate Debt Policy and the Determination of Corporate Debt Capacity. Boston, MA: Harvard Business School, Harvard University.
Dosi, G., Fagiolo, G., Napoletano, M., and Roventini, A. (2012) Income Distribution, Credit and Fiscal Policies in an Agent-Based Keynesian Model. LEM paper series 2012/03, Sant'Anna School of Advanced Studies.
Dosi, G., Fagiolo, G., and Roventini, A. (2010) Schumpeter meeting Keynes: A policy-friendly model of endogenous growth and business cycles. Journal of Economic Dynamics and Control 34 (9), 17481767.
Eliasson, G. (1977) Competition and market processes in a simulation model of the Swedish economy. American Economic Review 67, 277281.
Elliott, D. (2009) Quantifying the Effects on Lending of Increased Capital Requirements. Pew Financial Reform Project Briefing Paper 7.
Elliott, D. (2010) A Further Exploration of Capital Requirements: Effects of Competition from Other Financial Sectors and Effects of Size of Bank or Borrower and of Loan Type. Mimeo, The Brooking Institution.
Epstein, J.M. and Axtell, R.L. (1996) Growing Artificial Societies: Social Science from the Bottom Up. Cambridge, MA: MIT Press.
Fagiolo, G., Dosi, G., and Gabriele, R. (2004) Matching, bargaining, and wage setting in an evolutionary model of labor market and output dynamics. Advances in Complex Systems 7 (2), 157186.
Fagiolo, G. and Roventini, A. (2009) On the scientific status of economic policy: A tale of alternative paradigms. The Knowledge Engineering Review 27(Special Issue 02), 163185.
Fagiolo, G. and Roventini, A. (2012) Macroeconomic Policy in DSGE and Agent-Based Models. SSRN Workin Paper Series, available at
Flannery, M.J. (1994) Debt maturity and the deadweight cost of leverage: Optimally financing banking firms. American Economic Review 84 (1), 320331.
Flannery, M.J. and Rangan, K.P. (2006) Partial adjustment toward target capital structures. Journal of Financial Economics 79 (3), 469506.
Fostel, A. and Geanakoplos, J. (2008) Leverage cycles and the anxious economy. American Economic Review 98 (4), 12111244.
Frank, M.Z. and Goyal, V.K. (2008) Tradeoff and pecking order theories of debt. In Eckbo, E. (ed.), The Handbook of Empirical Corporate Finance, pp. 135197. Amsterdam, Netherlands: Elsevier B.V.
Francis, W.B. and Osborne, M. (2012) Capital requirements and bank behavior in the UK: Are there lessons for international capital standards? Journal of Banking & Finance 36 (3), 803816.
Frank, M.Z. and Goyal, V.K. (2015) The profits-leverage puzzle revisited. Review of Finance 19 (4), 14151453.
Gaffard, J.-L. and Napoletano, M. (2012) Agent-based models and economic policy. Revue de l'OFCE: Debates and Policies.
Gaffeo, G., Gatti, D. Delli, Desiderio, S., and Gallegati, M. (2008) Adaptive microfoundations for emergent macroeconomics. Eastern Economic Journal 34 (4), 441463.
Gai, P. and Kapadia, S. (2010) Contagion in financial networks. Proceedings of the Royal Society A: Mathematical, Physical and Engineering Science 466 (2120), 24012423.
Gambacorta, L. (2011) Do bank capital and liquidity affect real economic activity in the long run? A VECM analysis for the US. Economic Notes 40 (3), 7591.
Geanakoplos, J. (2010) Leverage Cycle. Cowles foundation paper 1304, Yale University.
Godley, W. and Lavoie, M. (2006) Monetary Economics: An Integrated Approach to Credit, Money, Income, Production and Wealth. London, UK: Palgrave MacMillan.
Graham, J.R. and Harvey, C. (2001) The theory and practice of corporate finance. Journal of Financial Economics 60, 187243.
Greenlaw, D., Hatzius, J., Kashyap, A.K., and Shin, H.S. (2008) Leveraged losses: Lessons from the mortgage market meltdown. Proceedings of the U.S. Monetary Policy Forum.
Gropp, R. and Heider, F. (2010) The determinants of bank capital structure. Review of Finance 14 (4), 587622.
Haber, G. (2008) Monetary and fiscal policy analysis with an agent-based macroeconomic model. Jahrbücher für Nationalökonomie und Statistik 228, 276295.
Hanson, S., Kashyap, A., and Stein, J. (2010) An Analysis of the Impact of Substantially Heightened Capital Requirements on Large Institutions. Mimeo, University of Chicago, Booth School of Business and Harvard University.
He, Z., Khang, I.G., and Krishnamurthy, A. (2010) Balance sheet adjustments in the 2008 crisis. IMF Economic Review 58, 118156.
Hellwig, M. (2010) Capital regulation after the crisis: Business as usual? CESifo DICE Report 8 (2), 4046.
Hovakimian, A., Opler, T., and Titman, S. (2001) The debt-equity choice. Journal of Financial and Quantitative Analysis 36, 124.
Jensen, M.C. and Meckling, W.H. (1976) Theory of the firm: Managerial behavior, agency costs, and ownership structure. Journal of Financial Economics 3, 305360.
Jokipii, T. and Milne, A. (2008) The cyclical behaviour of European bank capital buffers. Journal of Banking & Finance 32 (8), 14401451.
Kalemli-Ozcan, S., Sorensen, B., and Yesiltas, S. (2011) Leverage Across Firms, Banks, and Countries. NBER working papers 17354, NBER, Cambridge, MA.
Kiema, I. and Jokivuolle, E. (2011) Leverage Ratio Requirement, Credit Allocation and Bank Stability. Bank of Finland Research discussion papers 10.
King, M.R. (2010) Mapping Capital and Liquidity Requirements to Bank Lending Spreads. BIS working papers 324.
Kinsella, S., Greiff, M., and Nell, E. (2011) Income distribution in a stock-flow consistent model with education and technological change. Eastern Economic Journal 37 (1), 134149.
Kirman, A.P. (1992) Whom or what does the representative individual represent? Journal of Economic Perspectives 6 (2), 117136.
Kose, M.A., Prasad, E., Rogoff, K., and Wei, S.J. (2009) Financial globalization: A reappraisal. IMF staff papers 56 (1), 862.
Krug, S., Lengnick, M., and Wohltmann, H.W. (2015) The impact of Basel III on financial (in)stability - an agent-based credit network approach. Quantitative Finance 15 (12), 19171932.
Lazonick, W. and O'Sullivan, M. (2000) Maximising shareholder value: A new ideology for corporate governance. Economy and Society 29 (1), 1335.
LeBaron, B. and Tesfatsion, L.S. (2008) Modeling macroeconomies as open-ended dynamic systems of interacting agents. American Economic Review 98 (2), 246250.
Lemmon, M., Roberts, M., and Zender, J. (2008) Back to the beginning: Persistence and the cross-section of corporate capital structure. Journal of Finance 63, 15751608.
Levine, R. (2005) Finance and growth: Theory and evidence. In Aghion, P. and Durlauf, S.N. (eds.), Handbook of Economic Growth, vol. 1A, Chap. 12. Amsterdam, Netherlands: Elsevier B.V.
Mannaro, K., Marchesi, M., and Setzu, A. (2008) Using an artificial financial market for assessing the impact of Tobin-like transaction taxes. Journal of Economic Behavior and Organization 67, 445462.
Mehrotra, V., Mikkelsen, W., and Partch, M. (2003) Design of financial policies in corporate spin-offs. Review of Financial Studies 16, 13591388.
Mora, N. and Logan, A. (2012) Shocks to bank capital: Evidence from UK banks at home and away. Applied Economics 44 (9), 11031119.
Moral-Benito, E. and Roehn, O. (2014) The Impact of Financial (De)Regulation on Current Account Balances. Documentos de Trabajo 1424, Banco de Espana.
Morellec, E., Nikolov, B., and Schurhoff, N. (2012) Corporate governance and capital structure dynamics. Journal of Finance 67, 803848.
Myers, S.C. (1977) Determinants of corporate borrowing. Journal of Financial Economics 5 (2), 147175.
Myers, S.C. and Majluf, N.S. (1984) Corporate financing and investment decisions when firms have information that investors do not have. Journal of Financial Economics 13, 87224.
Neuberger, D. and Rissi, R. (2012) Macroprudential Banking Regulation: Does One Size Fit All? Thuenen-Series of Applied Economic Theory No. 124, University of Rostock.
Neugart, M. (2008) Labor market policy evaluation with ACE. Journal of Economic Behavior and Organization 67, 418430.
Orcutt, G.H. (1957) A new type of socio economic system. Review of Economics and Statistics 58, 773797.
Rajan, R. and Zingales, L. (1995) What do we know about capital structure? Some evidence from international data. Journal of Finance 50, 14211460.
Rengs, B., Scholz-Wackerle, M., Gazheli, A., Antal, M., and van den Berg, J. (2015) Testing Innovation, Employment and Distributional Impacts of Climate Policy Packages in a Macro-Evolutionary Systems Setting. Working paper 83, WWWforEurope.
Riccetti, L., Russo, A., and Gallegati, M. (2013a) Leveraged network-based financial accelerator. Journal of Economic Dynamics and Control 37 (8), 16261640.
Riccetti, L., Russo, A., and Gallegati, M. (2013b) Unemployment benefits and financial leverage in an agent based macroeconomic model. Economics: The Open-Access, Open-Assessment E-Journal 7 (2013-42), 144.
Riccetti, L., Russo, A., and Gallegati, M. (2015) An agent-based decentralized matching macroeconomic model. Journal of Economic Interaction and Coordination 10 (2), 305332.
Russo, A., Catalano, M., Gaffeo, E., Gallegati, M., and Napoletano, M. (2007) Industrial dynamics, fiscal policy and R&D: Evidence from a computational experiment. Journal of Economic Behavior and Organization 64 (3–4), 426447.
Salle, I., Yildizoglu, M., and Sénégas, M.A. (2013) Inflation targeting in a learning economy: An ABM perspective. Economic Modelling 34, 114128.
Seppecher, P. (2012) Flexibility of wages and macroeconomic instability in an agent-based computational model with endogenous money. Macroeconomic Dynamics 16 (s2), 284297.
Simon, H.A. (1957) Models of Man. New York: Wiley & Sons.
Sinha, A. (2012) Financial Sector Regulation and Implications for Growth. BIS papers 62.
Sinitskaya, E. and Tesfatsion, L.S. (2015) Macroeconomies as constructively rational games. Journal of Economic Dynamics and Control 61, 152182.
Skinner, D.J. (2008) The evolving relation between earnings, dividends, and stock repurchases. Journal of Financial Economics 87, 582609.
Stockhammer, E. (2004) Financialisation and the slowdown of accumulation. Cambridge Journal of Economics 28 (5), 719741.
Strebulaev, I.A. and Whited, T.M. (2012) Dynamic Models and Structural Estimation in Corporate Finance. Boston and Delft: Now Publisher.
Tesfatsion, L.S. and Judd, K.L. (2006) Handbook of Computational Economics: Agent-Based Computational Economics, vol. 2. Amsterdam: North-Holland, Elsevier.
Tutino, F., Birindelli, G., and Ferretti, P. (2012) Bank capital and Basel 3 impacts on Italian banks. Corporate Ownership & Control 10 (1), 7587.
Van der Hoog, S. and Dawid, H. (2015) Bubbles, Crashes and The Financial Cycle: Insights From a Stockflow Consistent Agent-Based Macroeconomic Model. Working papers in Economics and Management 1/2015, University of Bielefeld.
Vives, X. (2014) Strategic complementarity, fragility, and regulation. Review of Financial Studies 27 (12), 35473592.
Vollmer, U. and Wiese, H. (2013) Minimum capital requirements, bank supervision and special resolution schemes. Consequences for bank risk-taking. Journal of Financial Stability 9 (4), 487497.
Westerhoff, F. (2008) The use of agent-based financial market models to test the effectiveness of regulatory policies. Jahrbücher für Nationalökonomie und Statistik 228, 195227.
Westerhoff, F. and Dieci, R. (2006) The effectiveness of Keynes' Tobin transaction taxes when heterogeneous agents can trade in different markets: A behavioral finance approach. Journal of Economic Dynamics and Control 30, 293322.
Westerhoff, F. and Franke, R. (2012) Agent-Based Models for Economic Policy Design: Two Illustrative Examples. BERG working paper 88, University of Bamberg.
Zhou, C. (2013) The impact of imposing capital requirements on systemic risk. Journal of Financial Stability 9 (3), 320329.
Recommend this journal

Email your librarian or administrator to recommend adding this journal to your organisation's collection.

Macroeconomic Dynamics
  • ISSN: 1365-1005
  • EISSN: 1469-8056
  • URL: /core/journals/macroeconomic-dynamics
Please enter your name
Please enter a valid email address
Who would you like to send this to? *



Altmetric attention score

Full text views

Total number of HTML views: 0
Total number of PDF views: 0 *
Loading metrics...

Abstract views

Total abstract views: 0 *
Loading metrics...

* Views captured on Cambridge Core between <date>. This data will be updated every 24 hours.

Usage data cannot currently be displayed