Sato, AH;
Tasca, P;
Isogai, T;
(2019)
Dynamic Interaction Between Asset Prices and Bank Behavior: A Systemic Risk Perspective.
Computational Economics
, 54
(4)
pp. 1505-1537.
10.1007/s10614-018-9792-y.
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Abstract
We propose a simple model to simulate an interaction between banks and a financial market. In our model, banks are exposed to two sources of risks: market risk from their investments in assets external to the banking system and credit risk from lending in the interbank market. By and large, both risks increase during severe financial turmoil. In this scenario, the paper shows the conditions under which individual and the systemic defaults tend to coincide. This paper attempts to conduct a numerical simulation of banking ecosystems by using the actual values of financial items extracted from 89 Japanese banks’ balance sheets. From this numerical simulation, we confirm two points: (1) when financial market prices decrease due to crashes in a trend-followers-dominant market, banks lose their net worth coincidentally. Thus, the capital adequacy ratio decreases synchronously, and any bank may not provide other banks with money through the interbank markets. (2) In a contrarians-dominant or contrarians-predominant market, we observed mean-reverting fluctuations in market prices. Bankruptcies happen asynchronously, and market prices eventually decrease. However, other banks may provide the bank suffering from a shortage of assets with money through the interbank markets. We further compare the characteristics of the banking system in four types of market modes.
Type: | Article |
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Title: | Dynamic Interaction Between Asset Prices and Bank Behavior: A Systemic Risk Perspective |
Open access status: | An open access version is available from UCL Discovery |
DOI: | 10.1007/s10614-018-9792-y |
Publisher version: | https://doi.org/10.1007/s10614-018-9792-y |
Language: | English |
Additional information: | This version is the author accepted manuscript. For information on re-use, please refer to the publisher’s terms and conditions. |
Keywords: | Banking system; capital adequacy ratio (CAR); procyclicality; agent-based model; financial market |
UCL classification: | UCL UCL > Provost and Vice Provost Offices > UCL BEAMS UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Engineering Science UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Engineering Science > Dept of Computer Science |
URI: | https://discovery.ucl.ac.uk/id/eprint/10179667 |
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