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The search for an optimal RBC regulatory system

Dror Parnes (Finance Department, College of Business, University of South Florida, Tampa, Florida, USA)

Journal of Financial Economic Policy

ISSN: 1757-6385

Article publication date: 1 April 2014

123

Abstract

Purpose

The author assembles three hypothetical regulatory regimes and deploys computer simulations to contrast different banking systems based on conventional strategies for appointing risk-based capital minimum thresholds. The paper aims to discuss these issues.

Design/methodology/approach

The author instigates cascading failure models within numerous directed graphs and measures the inflicted costs, the accumulated bank failures, and the general robustness of the networks following various economic shocks.

Findings

The author finds that a homogeneous regulatory regime is an inferior approach. However, a selected too-big-to-fail scheme portrays the best defensive banking model with the lowest number of total bank failures and the fewest banks' costs and social costs.

Research limitations/implications

The author can only theoretically examine this topic.

Originality/value

The author overcomes some obstacles in prior studies including the use of a large and complex network and the proportional allocation of funds upon a bank failure.

Keywords

Acknowledgements

JEL classification – G01, G17, G21, G28

Citation

Parnes, D. (2014), "The search for an optimal RBC regulatory system", Journal of Financial Economic Policy, Vol. 6 No. 1, pp. 78-92. https://doi.org/10.1108/JFEP-05-2013-0021

Publisher

:

Emerald Group Publishing Limited

Copyright © 2014, Emerald Group Publishing Limited

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