Basel III capital surcharges for G-SIBs are far less effective in managing systemic risk in comparison to network-based, systemic risk-dependent financial transaction taxes

Authored by Stefan Thurner, Sebastian Poledna, Olaf Bochmann

Date Published: 2017

DOI: 10.1016/j.jedc.2017.02.004

Sponsors: European Union

Platforms: No platforms listed

Model Documentation: Other Narrative Mathematical description

Model Code URLs: Model code not found

Abstract

In addition to constraining bilateral exposures of financial institutions, there exist essentially two options for future financial regulation of systemic risk: First, regulation could attempt to reduce the financial fragility of global or domestic systemically important financial institutions (G-SIBS or D-SIBs), as for instance proposed by Basel III. Second, it could focus on strengthening the financial system as a whole by reducing the probability of large-scale cascading events. This can be achieved by re-shaping the topology of financial networks. We use an agent-based model of a financial system and the real economy to study and compare the consequences of these two options. By conducting three computer experiments with the agent-based model we find that re-shaping financial networks is more effective and efficient than reducing financial fragility. Capital surcharges for G-SIBs could reduce systemic risk, but they would have to be substantially larger than those specified in the current Basel III proposal in order to have a measurable impact. This would cause a loss of efficiency. (C) 2017 Elsevier B.V. All rights reserved.

Tags

Agent-based models Agent-based modeling Business Fluctuations resilience Banking regulation Systemic risk Basel III Credit Fragility Economy Debtrank