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

Poledna S, Bochmann O, & Thurner S (2017). 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. Journal of Economic Dynamics and Control 77: 230-246. DOI:10.1016/j.jedc.2017.02.004.

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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.pdf - Accepted Version
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Project: Complexity Research Initiative for Systemic InstabilitieS (CRISIS, FP7 288501), multi-LAyer SpAtiotemporal Generalized NEtworks (LASAGNE, FP7 318132), Foundational Research on MULTIlevel comPLEX networks and systems (MULTIPLEX, FP7 317532)

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.

Item Type: Article
Uncontrolled Keywords: Basel III; Systemic Risk; Resilience; Agent-Based Modelling; Self-organisation; Network Optimisation; DebtRank; Banking regulation; Sustainability
Research Programs: Advanced Systems Analysis (ASA)
Depositing User: Romeo Molina
Date Deposited: 06 Mar 2017 09:39
Last Modified: 30 Mar 2017 08:16
URI: http://pure.iiasa.ac.at/14429

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