Publication detail

Agent-based modeling of systemic risk in the European banking sector

Author(s): PhDr. Tomáš Klinger Ph.D.,
prof. PhDr. Petr Teplý Ph.D.,
Type: Articles in journals with impact factor
Year: 2019
Number: 0
ISSN / ISBN: ISSN: 1860-7128 (electronic version)
Published in: Journal of Economic Interaction and Coordination, Springer, Germany
Publishing place: Germany
Keywords: agent-based models, bank, contagion, network models, systemic risk
JEL codes: C63, D85, G01, G21, G28
Suggested Citation: Teplý, P., Klinger, T. (2019). Agent-based modeling of systemic risk in the European banking sector, Journal of Economic Interaction and Coordination. Vol. 14, No 4, pp. 811–833 (https://doi.org/10.1007/s11403-018-0226-7)
Grants: GACR 17-02509S - Emerging financial risks during a global low interest rate environment VŠE IP100040
Abstract: In this paper, we use an agent-based simulation combined with innovative calibration techniques to model the European banking system as accurately as possible. Our novel contribution to the recent literature involves adding bank heterogeneity to the model. To estimate the levels of shock propagation in large-scale events, such as the default of multiple banks, as well as smaller events, such as the defaults of an individual bank, we provide granular modeling of bank behavior. We extend the existing network approach by adding the ability to model banks of various sizes and the detailed connections of 286 individual banks across 9 European countries. Our main results show how the failure of a large Italian bank or of a medium-sized German bank might create a cascade of problems for the entire European banking sector. Our results reveal that Italian banks make a much larger contribution to systemic risk than German or French banks. We believe that computational experiments in this model provide valuable insights into systemic risk within the European banking system for policy makers when estimating the systemic effects of individual bank defaults. From a regulatory perspective, we recommend the introduction of a tighter limit for all types of inter-bank exposures than the recent limit of 25% of Tier 1 capital. Moreover, we propose an increase in the risk-weights for exposures to large banks in Germany, France, Italy, and Spain.

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