New methods that modify systemic risk
To minimise systemic risk in the financial system, European policymakers have implemented several measures, including liquidity provisions, quantitative easing and nationalisations. However, they are largely unproven and their effectiveness is unknown. There is a need for a theoretical foundation that will identify causes for banking crises and measure the effectiveness of potential crisis intervention policies. With this in mind, the EU-funded MACROBANK (Systemic risks and macroprudential regulation in banking) project developed novel macroeconomic models for the competitive banking sector. The dynamic models are able to examine the usefulness of new crises intervention measures and simulate policy strategies. They can also enhance overall understanding of crisis intervention and its impact on the economy. To achieve its aims, the project created a theoretical foundation and toolbox for policymakers. The project team developed all the required software tools for computer simulations that were used to analyse and test the effectiveness of crisis intervention policies. The models focused on reducing public debt, controlling inflation and deflation, and restoring central bank activities to pre-crisis levels. Results of the analysis indicate that it might be much more effective to limit the variation of future wealth directly. A capital adequacy rule that will fit all institutions when reducing default risk is not possible even though that is the aim of financial regulation. Effective regulation needs to take into account the risk-taking behaviour of intermediaries. MACROBANK has helped to establish a macroeconomic framework that allows for a complete outlook on banking systems that was previously non-existent. This can lead to a more theoretical basis for modern crisis intervention policies.
Keywords
Systemic risk, financial crisis, macroeconomic, crisis intervention, MACROBANK, banking
