The search for an optimal RBC regulatory system
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