Basel III capital surcharges for G-SIBs are far less effective in managing systemic risk in comparison to network-based,systemic risk-dependent financial transaction taxes |
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| Institution: | 1. IIASA, Schlossplatz 1, A-2361 Laxenburg, Austria;2. Section for Science of Complex Systems, Medical University of Vienna, Spitalgasse 23, 1090, Austria;3. Santa Fe Institute, 1399 Hyde Park Road, Santa Fe, NM 87501, USA;4. Institute of New Economic Thinking at the Oxford Martin School, Eagle House, Walton Well Rd., Oxford OX2 3ED, UK;5. Mathematical Institute, University of Oxford, Woodstock Rd., Oxford OX2 6GG, UK;6. Complexity Science Hub Vienna, Josefstädter Straße 39, 1080 Vienna, Austria;1. Zeppelin University Friedrichshafen, Germany;2. Mendel University Brno, Czech Republic;3. Faculty of Economics and Business Administration, Vilnius University, Lithuania;4. University of St Gallen, Switzerland;1. Shanghai Gold Exchange, China;2. School of Management, Fudan University, China;3. Department of Finance and Accounting, EBS Business School, Germany;4. Department of Management and Economics, University of Trento, Italy |
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| Abstract: | In addition to constraining bilateral exposures of financial institutions, there exist essentially two options for future financial regulation of systemic risk: First, regulation could attempt to reduce the financial fragility of global or domestic systemically important financial institutions (G-SIBs or D-SIBs), as for instance proposed by Basel III. Second, it could focus on strengthening the financial system as a whole by reducing the probability of large-scale cascading events. This can be achieved by re-shaping the topology of financial networks. We use an agent-based model of a financial system and the real economy to study and compare the consequences of these two options. By conducting three computer experiments with the agent-based model we find that re-shaping financial networks is more effective and efficient than reducing financial fragility. Capital surcharges for G-SIBs could reduce systemic risk, but they would have to be substantially larger than those specified in the current Basel III proposal in order to have a measurable impact. This would cause a loss of efficiency. |
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