Hostname: page-component-78c5997874-lj6df Total loading time: 0 Render date: 2024-11-10T21:26:57.320Z Has data issue: false hasContentIssue false
  • English
  • Français

FINANCIAL REGULATION AND ENDOGENOUS MACROECONOMIC CRISES

Published online by Cambridge University Press:  10 August 2017

Luca Riccetti ,
Alberto Russo  and
Mauro Gallegati
Luca Riccetti
Affiliation:
Università degli Studi di Macerata
Alberto Russo*
Affiliation:
Università Politecnica delle Marche
Mauro Gallegati
Affiliation:
Università Politecnica delle Marche
*
Address correspondence to: Alberto Russo, Department of Management, Università Politecnica delle Marche, Piazzale Martelli 8, 60121 Ancona (Italy); e-mail: alberto.russo@univpm.it.
Get access Rights & Permissions [Opens in a new window]

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).

Keywords

Financial RegulationBusiness CycleLeverageCrisisComputational Macroeconomics
Type
Articles
Information
Macroeconomic Dynamics , Volume 22 , Issue 4 , June 2018 , pp. 896 - 930
Copyright
Copyright © Cambridge University Press 2017 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

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.

References

REFERENCES

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.Google Scholar
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.Google Scholar
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.Google Scholar
Adrian, T. and Shin, H.S. (2008) Liquidity, monetary policy and financial cycles. Current Issues in Economics and Finance 14 (1), 1–7.Google Scholar
Adrian, T. and Shin, H.S. (2009) Money, liquidity, and monetary policy. American Economic Review 99 (2), 600–605.Google Scholar
Adrian, T. and Shin, H.S. (2010) Liquidity and leverage. Journal of Financial Intermediation 19 (3), 418–437.Google Scholar
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), 43–56.CrossRefGoogle Scholar
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), 246–265.Google Scholar
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.Google Scholar
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), 159–166.Google Scholar
Allen, F. and Gale, D. (2000) Financial contagion. Journal of Political Economy 108 (1), 1–33.Google Scholar
Ashraf, Q., Gershman, B., and Howitt, P. (2016) How inflation affects macroeconomic performance: An agent-based computational investigation. Macroeconomic Dynamics 20 (2), 558–581.CrossRefGoogle Scholar
Babutsidze, Z. (2012) Asymmetric (s,s) pricing: Implications for monetary policy. Revue de l'OFCE 124, 177–204.Google Scholar
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), 1121–1141.Google Scholar
BCBS (2010) An assessment of the long-term economic impact of stronger capital and liquidity requirements. August 2010, Bank for International Settlements, Basel, Switzerland.Google Scholar
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.Google Scholar
Bergmann, B.R. (1974) A microsimulation of the macroeconomy with explicitely represented money flows. Annals of Economic and Social Measurement 3, 475–489.Google Scholar
Booth, L., Demirgu-Kunt, V.A. Asli, and Maksimovic, V. (2001) Capital structures in developing countries. Journal of Finance 56 (1), 87–130.CrossRefGoogle Scholar
Brav, A., Graham, J.R., Harvey, C.R., and Michaely, R. (2005) Payout policy in the 21st century. Journal of Financial Economics 77, 483–527.Google Scholar
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: http://ssrn.com/abstract=1707962.Google Scholar
Broner, F.A. and Ventura, J. (2013) Rethinking the Effects of Financial Liberalization. Working paper, Universitat Pompeu Fabra.Google Scholar
Brunnermeier, M.K. and Pedersen, L.H. (2009) Market liquidity and funding liquidity. Review of Financial Studies 22 (6), 2201–2238.Google Scholar
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.Google Scholar
Cecchetti, S.G. and Kharroubi, E. (2012) Reassessing the Impact of Finance on Growth. BIS working papers 381, Bank for International Settlements, Basel, Switzerland.Google Scholar
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), 1–32.Google Scholar
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), 1–49.Google Scholar
Cincotti, S., Raberto, M., and Teglio, A. (2012b) Macroprudential policies in an agent-based artificial economy. Revue de l'OFCE 124, 205–234.Google Scholar
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.Google Scholar
Dawid, H., Gemkow, S., Harting, P., van der Hoog, S., and Neugart, M. (2011), Eurace@Unibi Model v1.0 User Manual.Google Scholar
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.Google Scholar
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.Google Scholar
Dawid, H. and Neugart, M. (2011) Agent-based models for economic policy design. Eastern Economic Journal 37 (1), 44–50.Google Scholar
DeAngelo, H., DeAngelo, L., and Skinner, D.J. (2004) Are dividends disappearing? Dividend concentration and the consolidation of earnings. Journal of Financial Economics 72, 425–456.CrossRefGoogle Scholar
Delli Gatti, D., Gaffeo, E., and Gallegati, M. (2005) The apprentice wizard: monetary policy, complexity and learning. New Mathematics and Natural Computation 1 (1), 109–128.Google Scholar
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), 195–212.CrossRefGoogle Scholar
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), 1627–1650.Google Scholar
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, 62–82.Google Scholar
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, 1234–1261.Google Scholar
Diamond, D.W. and Rajan, R. (2000) A theory of bank capital. Journal of Finance 55 (6), 2431–2465.CrossRefGoogle Scholar
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.Google Scholar
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.Google Scholar
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), 1748–1767.Google Scholar
Eliasson, G. (1977) Competition and market processes in a simulation model of the Swedish economy. American Economic Review 67, 277–281.Google Scholar
Elliott, D. (2009) Quantifying the Effects on Lending of Increased Capital Requirements. Pew Financial Reform Project Briefing Paper 7.Google Scholar
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.Google Scholar
Epstein, J.M. and Axtell, R.L. (1996) Growing Artificial Societies: Social Science from the Bottom Up. Cambridge, MA: MIT Press.Google Scholar
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), 157–186.CrossRefGoogle Scholar
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), 163–185.Google Scholar
Fagiolo, G. and Roventini, A. (2012) Macroeconomic Policy in DSGE and Agent-Based Models. SSRN Workin Paper Series, available at http://ssrn.com/abstract=2011717.Google Scholar
Flannery, M.J. (1994) Debt maturity and the deadweight cost of leverage: Optimally financing banking firms. American Economic Review 84 (1), 320–331.Google Scholar
Flannery, M.J. and Rangan, K.P. (2006) Partial adjustment toward target capital structures. Journal of Financial Economics 79 (3), 469–506.Google Scholar
Fostel, A. and Geanakoplos, J. (2008) Leverage cycles and the anxious economy. American Economic Review 98 (4), 1211–1244.Google Scholar
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. 135–197. Amsterdam, Netherlands: Elsevier B.V.Google Scholar
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), 803–816.CrossRefGoogle Scholar
Frank, M.Z. and Goyal, V.K. (2015) The profits-leverage puzzle revisited. Review of Finance 19 (4), 1415–1453.Google Scholar
Gaffard, J.-L. and Napoletano, M. (2012) Agent-based models and economic policy. Revue de l'OFCE: Debates and Policies.Google Scholar
Gaffeo, G., Gatti, D. Delli, Desiderio, S., and Gallegati, M. (2008) Adaptive microfoundations for emergent macroeconomics. Eastern Economic Journal 34 (4), 441–463.Google Scholar
Gai, P. and Kapadia, S. (2010) Contagion in financial networks. Proceedings of the Royal Society A: Mathematical, Physical and Engineering Science 466 (2120), 2401–2423.Google Scholar
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), 75–91.Google Scholar
Geanakoplos, J. (2010) Leverage Cycle. Cowles foundation paper 1304, Yale University.CrossRefGoogle Scholar
Godley, W. and Lavoie, M. (2006) Monetary Economics: An Integrated Approach to Credit, Money, Income, Production and Wealth. London, UK: Palgrave MacMillan.Google Scholar
Graham, J.R. and Harvey, C. (2001) The theory and practice of corporate finance. Journal of Financial Economics 60, 187–243.Google Scholar
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.Google Scholar
Gropp, R. and Heider, F. (2010) The determinants of bank capital structure. Review of Finance 14 (4), 587–622.Google Scholar
Haber, G. (2008) Monetary and fiscal policy analysis with an agent-based macroeconomic model. Jahrbücher für Nationalökonomie und Statistik 228, 276–295.Google Scholar
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.Google Scholar
He, Z., Khang, I.G., and Krishnamurthy, A. (2010) Balance sheet adjustments in the 2008 crisis. IMF Economic Review 58, 118–156.Google Scholar
Hellwig, M. (2010) Capital regulation after the crisis: Business as usual? CESifo DICE Report 8 (2), 40–46.Google Scholar
Hovakimian, A., Opler, T., and Titman, S. (2001) The debt-equity choice. Journal of Financial and Quantitative Analysis 36, 1–24.Google Scholar
Jensen, M.C. and Meckling, W.H. (1976) Theory of the firm: Managerial behavior, agency costs, and ownership structure. Journal of Financial Economics 3, 305–360.Google Scholar
Jokipii, T. and Milne, A. (2008) The cyclical behaviour of European bank capital buffers. Journal of Banking & Finance 32 (8), 1440–1451.Google Scholar
Kalemli-Ozcan, S., Sorensen, B., and Yesiltas, S. (2011) Leverage Across Firms, Banks, and Countries. NBER working papers 17354, NBER, Cambridge, MA.CrossRefGoogle Scholar
Kiema, I. and Jokivuolle, E. (2011) Leverage Ratio Requirement, Credit Allocation and Bank Stability. Bank of Finland Research discussion papers 10.Google Scholar
King, M.R. (2010) Mapping Capital and Liquidity Requirements to Bank Lending Spreads. BIS working papers 324.Google Scholar
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), 134–149.Google Scholar
Kirman, A.P. (1992) Whom or what does the representative individual represent? Journal of Economic Perspectives 6 (2), 117–136.Google Scholar
Kose, M.A., Prasad, E., Rogoff, K., and Wei, S.J. (2009) Financial globalization: A reappraisal. IMF staff papers 56 (1), 8–62.CrossRefGoogle Scholar
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), 1917–1932.Google Scholar
Lazonick, W. and O'Sullivan, M. (2000) Maximising shareholder value: A new ideology for corporate governance. Economy and Society 29 (1), 13–35.Google Scholar
LeBaron, B. and Tesfatsion, L.S. (2008) Modeling macroeconomies as open-ended dynamic systems of interacting agents. American Economic Review 98 (2), 246–250.Google Scholar
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, 1575–1608.Google Scholar
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.Google Scholar
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, 445–462.Google Scholar
Mehrotra, V., Mikkelsen, W., and Partch, M. (2003) Design of financial policies in corporate spin-offs. Review of Financial Studies 16, 1359–1388.Google Scholar
Mora, N. and Logan, A. (2012) Shocks to bank capital: Evidence from UK banks at home and away. Applied Economics 44 (9), 1103–1119.Google Scholar
Moral-Benito, E. and Roehn, O. (2014) The Impact of Financial (De)Regulation on Current Account Balances. Documentos de Trabajo 1424, Banco de Espana.CrossRefGoogle Scholar
Morellec, E., Nikolov, B., and Schurhoff, N. (2012) Corporate governance and capital structure dynamics. Journal of Finance 67, 803–848.Google Scholar
Myers, S.C. (1977) Determinants of corporate borrowing. Journal of Financial Economics 5 (2), 147–175.Google Scholar
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, 87–224.Google Scholar
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.Google Scholar
Neugart, M. (2008) Labor market policy evaluation with ACE. Journal of Economic Behavior and Organization 67, 418–430.Google Scholar
Orcutt, G.H. (1957) A new type of socio economic system. Review of Economics and Statistics 58, 773–797.Google Scholar
Rajan, R. and Zingales, L. (1995) What do we know about capital structure? Some evidence from international data. Journal of Finance 50, 1421–1460.Google Scholar
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.Google Scholar
Riccetti, L., Russo, A., and Gallegati, M. (2013a) Leveraged network-based financial accelerator. Journal of Economic Dynamics and Control 37 (8), 1626–1640.Google Scholar
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), 1–44.Google Scholar
Riccetti, L., Russo, A., and Gallegati, M. (2015) An agent-based decentralized matching macroeconomic model. Journal of Economic Interaction and Coordination 10 (2), 305–332.Google Scholar
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), 426–447.Google Scholar
Salle, I., Yildizoglu, M., and Sénégas, M.A. (2013) Inflation targeting in a learning economy: An ABM perspective. Economic Modelling 34, 114–128.Google Scholar
Seppecher, P. (2012) Flexibility of wages and macroeconomic instability in an agent-based computational model with endogenous money. Macroeconomic Dynamics 16 (s2), 284–297.Google Scholar
Simon, H.A. (1957) Models of Man. New York: Wiley & Sons.Google Scholar
Sinha, A. (2012) Financial Sector Regulation and Implications for Growth. BIS papers 62.Google Scholar
Sinitskaya, E. and Tesfatsion, L.S. (2015) Macroeconomies as constructively rational games. Journal of Economic Dynamics and Control 61, 152–182.Google Scholar
Skinner, D.J. (2008) The evolving relation between earnings, dividends, and stock repurchases. Journal of Financial Economics 87, 582–609.Google Scholar
Stockhammer, E. (2004) Financialisation and the slowdown of accumulation. Cambridge Journal of Economics 28 (5), 719–741.Google Scholar
Strebulaev, I.A. and Whited, T.M. (2012) Dynamic Models and Structural Estimation in Corporate Finance. Boston and Delft: Now Publisher.Google Scholar
Tesfatsion, L.S. and Judd, K.L. (2006) Handbook of Computational Economics: Agent-Based Computational Economics, vol. 2. Amsterdam: North-Holland, Elsevier.Google Scholar
Tutino, F., Birindelli, G., and Ferretti, P. (2012) Bank capital and Basel 3 impacts on Italian banks. Corporate Ownership & Control 10 (1), 75–87.Google Scholar
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.Google Scholar
Vives, X. (2014) Strategic complementarity, fragility, and regulation. Review of Financial Studies 27 (12), 3547–3592.Google Scholar
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), 487–497.Google Scholar
Westerhoff, F. (2008) The use of agent-based financial market models to test the effectiveness of regulatory policies. Jahrbücher für Nationalökonomie und Statistik 228, 195–227.Google Scholar
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, 293–322.Google Scholar
Westerhoff, F. and Franke, R. (2012) Agent-Based Models for Economic Policy Design: Two Illustrative Examples. BERG working paper 88, University of Bamberg.Google Scholar
Zhou, C. (2013) The impact of imposing capital requirements on systemic risk. Journal of Financial Stability 9 (3), 320–329.Google Scholar