Based on the IMF ABBA simulation created by Jorge A. Chan-Lau
Understanding the effects of regulatory capital reserve and leverage requirements requires understanding their effects on the banking sector as a whole, and the resulting risk exposure for individual banks.
From the paper:
Abstract A thorough analysis of risks in the banking system requires incorporating banks’ inherent heterogeneity and adaptive behavior in response to shocks and changes in business conditions and the regulatory environment. ABBA is an agent-based model for analyzing risks in the banking system in which banks’ business decisions drive the endogenous formation of interbank networks. ABBA allows for a rich menu of banks’ decisions, contingent on banks’ balance sheet and capital position, including dividend payment rules, credit expansion, and dynamic balance sheet adjustment via risk-weight optimization. The platform serves to illustrate the effect of changes on regulatory requirements on solvency, liquidity, and interconnectedness risk.
Running the Simulation
Parameters:
n_banks: Initial number of banks
LIBOR_rate: The interbank lending rate
rfree: initial deposits in a bank
reserve_rates: risk-free lending rate, sets the initial deposit rate for banks
min_reserves_ratio: required ratio of reserves to equity
CAR: required capital adequacy ratio
initial_equity: Starting bank equity
bankrupt_liquidation: Set to 0 if bank liquidates loans at face value, 1 if bank sells the assets at fire sale prices
n_firms: Initial number of firms - which originate loans
n_savers: Initial number of savers.
