In 2008 the intemperance of the banking industry, stemming from an accelerated process of banking innovation and deregulation, drove the global economy into a deep recession resulting in immense economic cost with significant social implications. In response to such events, regulatory reforms in the capacity of Basel III capital requirements, specifically, risk-based capital requirements and leverage, were introduced. These new set of reforms aimed to create a more stable and resilient financial system in an attempt to avert the recurrence of another global financial crisis. Accordingly, Basel III's prudential banking principles have received sizeable attention from several quarters as academics have investigated the impact of Basel III on banks' performance and its effectiveness in preventing another banking crisis. Despite the latter, to date, the existing literature provides vastly disparate evidence on Basel III's adequacy and is yet to reach a clear and decisive conclusion on its ability to foster a more stable, resilient and growth-promoting financial system.par The fundamental purpose of this thesis is to contribute towards this ongoing debate by providing new theoretical insights on the direct and indirect effects of Basel III and how such implications transferred throughout a widely interconnected economy. Specifically, unlike much of the existing theoretical and empirical literature that has examined the impact of Basel III in singular instances by isolating one sector from another, this thesis presents a more comprehensive investigation of the effectiveness of Basel III in creating a more stable and resilient financial system whilst maintaining, and not hindering, the overall growth of the economy. For this purpose, this thesis presents three theoretical chapters and one empirical chapter on the relationship between the banking industry and the real economy, wherein we introduce the role of Keynesian uncertainty as a relevant element in agents' decision-making process.par In the first chapter of this thesis, we present an in-depth review of the alternative theoretical microfoundations used to explain the existence of banks and their role in the dissemination of adverse shocks throughout the real economy. We propose that to construct a more comprehensive and realistic explanation for the existence of banks and their role in the dissemination of adverse shocks, throughout the real economy, one needs to break down the assumptions of perfect-competition and perfect-equilibrium and include both the concepts of time and Keynesian uncertainty. In the second part of chapter one, we document the sequence of causes and events that triggered the trend towards a megabank-centred shadow banking system resulted in the implementation of Basel III. Finally, given the technical inconsistencies and disparities between the existing definitions of financial stability and financial resilience, in the last part of chapter one, we propose a more complete and precise working definition of both elements of financial concern, which operates as our lenses of analysis throughout the remainder of this thesis. In the second chapter of this thesis, we investigate the effectiveness of Basel III in ensuring a more stable, resilient and growth-promoting financial system, via a dynamic Stock-Flow Consistent model. Chapter two begins by introducing the accounting principles underpinning our dynamic Stock-Flow Consistent model, which we use to investigate the effectiveness of Basel III on restoring a medium/long-term financial development and promoting the creation of money. In our investigation, we move from a steady-state, where the banking system is regulated by Basel II, towards a new state, where Basel III is into force. Our results suggest that, although the current banking regulation, Basel III, has explicitly set the minimum capital requirements towards higher levels, the latter has not been able to restore the stability of the financial system, nor encourage banks' incentive to keep its commitments with the real economy. Instead, our results suggest that the introduction of Basel III has, in recent years, contributed to the slow-down of economic recovery. In the third chapter of this thesis, we present an extended version of our dynamic Stock Flow Consistent model. Specifically, chapter three introduces an additional level of financial complexity by accounting for the level of perceived Keynesian uncertainty within the economy. In doing so, the efforts of chapter three contribute to the assessment of Basel III by examining its effectiveness in partnership with conventional and unconventional monetary policies and fiscal policies. The conclusions made by this chapter suggest that a higher degree of perceived Keynesian uncertainty holds economic activities down and also the effectiveness of Basel III in partnership with monetary and fiscal implementations. In the fourth chapter of this thesis, we explore, empirically, the role of banks as suppliers of private credit to the real economy. Following our line of thought - presented in chapter one and chapter three - we focus our empirical investigation upon the concept of Keynesian uncertainty and its relationship with banks' operations and their indirect/direct contribution to economic activities. Specifically, by adopting citeauthor{hansen1999}'s citeyearpar{hansen1999} fixed-effect threshold model, we examine the effects of private credit over tranquil and turbulent periods of Keynesian uncertainty. Our results show that in tranquil periods of Keynesian uncertainty banks are general growth-promoting, yet, in periods of heightened Keynesian uncertainty - mainly experienced post the 2008 financial crisis - the provision of credit made by banks has been growth-hindering. Accordingly, the results presented in chapter four not only furnish empirical support for the arguments put forward in chapter one and chapter three but also stress the salient nature of this thesis' line of enquiry, which call for a relevant commitment by policymakers and academics in designing a financial regulation theory that embraces the inherently unstable and uncertain nature of the financial system. In the final chapter of this thesis, we present our conclusive remarks.

Huaccha, G.G. (2020). Banking Regulation in a Dynamic Stock-Flow Consistent Model.

Banking Regulation in a Dynamic Stock-Flow Consistent Model

GLADYS GISSELL, HUACCHA
2020-01-01

Abstract

In 2008 the intemperance of the banking industry, stemming from an accelerated process of banking innovation and deregulation, drove the global economy into a deep recession resulting in immense economic cost with significant social implications. In response to such events, regulatory reforms in the capacity of Basel III capital requirements, specifically, risk-based capital requirements and leverage, were introduced. These new set of reforms aimed to create a more stable and resilient financial system in an attempt to avert the recurrence of another global financial crisis. Accordingly, Basel III's prudential banking principles have received sizeable attention from several quarters as academics have investigated the impact of Basel III on banks' performance and its effectiveness in preventing another banking crisis. Despite the latter, to date, the existing literature provides vastly disparate evidence on Basel III's adequacy and is yet to reach a clear and decisive conclusion on its ability to foster a more stable, resilient and growth-promoting financial system.par The fundamental purpose of this thesis is to contribute towards this ongoing debate by providing new theoretical insights on the direct and indirect effects of Basel III and how such implications transferred throughout a widely interconnected economy. Specifically, unlike much of the existing theoretical and empirical literature that has examined the impact of Basel III in singular instances by isolating one sector from another, this thesis presents a more comprehensive investigation of the effectiveness of Basel III in creating a more stable and resilient financial system whilst maintaining, and not hindering, the overall growth of the economy. For this purpose, this thesis presents three theoretical chapters and one empirical chapter on the relationship between the banking industry and the real economy, wherein we introduce the role of Keynesian uncertainty as a relevant element in agents' decision-making process.par In the first chapter of this thesis, we present an in-depth review of the alternative theoretical microfoundations used to explain the existence of banks and their role in the dissemination of adverse shocks throughout the real economy. We propose that to construct a more comprehensive and realistic explanation for the existence of banks and their role in the dissemination of adverse shocks, throughout the real economy, one needs to break down the assumptions of perfect-competition and perfect-equilibrium and include both the concepts of time and Keynesian uncertainty. In the second part of chapter one, we document the sequence of causes and events that triggered the trend towards a megabank-centred shadow banking system resulted in the implementation of Basel III. Finally, given the technical inconsistencies and disparities between the existing definitions of financial stability and financial resilience, in the last part of chapter one, we propose a more complete and precise working definition of both elements of financial concern, which operates as our lenses of analysis throughout the remainder of this thesis. In the second chapter of this thesis, we investigate the effectiveness of Basel III in ensuring a more stable, resilient and growth-promoting financial system, via a dynamic Stock-Flow Consistent model. Chapter two begins by introducing the accounting principles underpinning our dynamic Stock-Flow Consistent model, which we use to investigate the effectiveness of Basel III on restoring a medium/long-term financial development and promoting the creation of money. In our investigation, we move from a steady-state, where the banking system is regulated by Basel II, towards a new state, where Basel III is into force. Our results suggest that, although the current banking regulation, Basel III, has explicitly set the minimum capital requirements towards higher levels, the latter has not been able to restore the stability of the financial system, nor encourage banks' incentive to keep its commitments with the real economy. Instead, our results suggest that the introduction of Basel III has, in recent years, contributed to the slow-down of economic recovery. In the third chapter of this thesis, we present an extended version of our dynamic Stock Flow Consistent model. Specifically, chapter three introduces an additional level of financial complexity by accounting for the level of perceived Keynesian uncertainty within the economy. In doing so, the efforts of chapter three contribute to the assessment of Basel III by examining its effectiveness in partnership with conventional and unconventional monetary policies and fiscal policies. The conclusions made by this chapter suggest that a higher degree of perceived Keynesian uncertainty holds economic activities down and also the effectiveness of Basel III in partnership with monetary and fiscal implementations. In the fourth chapter of this thesis, we explore, empirically, the role of banks as suppliers of private credit to the real economy. Following our line of thought - presented in chapter one and chapter three - we focus our empirical investigation upon the concept of Keynesian uncertainty and its relationship with banks' operations and their indirect/direct contribution to economic activities. Specifically, by adopting citeauthor{hansen1999}'s citeyearpar{hansen1999} fixed-effect threshold model, we examine the effects of private credit over tranquil and turbulent periods of Keynesian uncertainty. Our results show that in tranquil periods of Keynesian uncertainty banks are general growth-promoting, yet, in periods of heightened Keynesian uncertainty - mainly experienced post the 2008 financial crisis - the provision of credit made by banks has been growth-hindering. Accordingly, the results presented in chapter four not only furnish empirical support for the arguments put forward in chapter one and chapter three but also stress the salient nature of this thesis' line of enquiry, which call for a relevant commitment by policymakers and academics in designing a financial regulation theory that embraces the inherently unstable and uncertain nature of the financial system. In the final chapter of this thesis, we present our conclusive remarks.
2020
DYMSKI, GARY
VERONESE PASSARELLA, MARCO
Huaccha, G.G. (2020). Banking Regulation in a Dynamic Stock-Flow Consistent Model.
Huaccha, GLADYS GISSELL
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11365/1116211
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