Financial regulations and bank credit to the real economy

Co-authors: Saqib Jafarey (City University London), James Porter (City University London), Giampaolo Gabbi (Sda Bocconi Milano)

We present an agent-based model focusing on the linkage between the interbank market and the real economy with a stylised central bank acting as lender of last resort. Using this model we address the tradeoff between stability and economic performance for different structures of the interbank market. We also explore the efficacy of recent regulatory reforms using our rich model. Our results suggest that the effects of regulatory leverage ratios on the banking sector?s performance can vary in a complex and non-monotonic way with the state of the economy, the degree of connectivity of the interbank market and the amount of information available to market participants on bank risks.