How banks’ capital ratio and size affect the stability of the banking system: a simulation-based study

Interbank money market concerns and actors’ strategies—A systematic review of 21st century literature

“…Through a study on the intensity of default spreads in different interbank network topologies, Rogers and Veraart (2013) found that when net assets decrease, both the losses due to default and the proportion of defaulting banks increase. This is aligned with Steinbacher and Steinbacher (2015)’s results regarding the expectation that larger banks are less defaulting than smaller banks, as mentioned above. Also, another finding of Capponi et al.…”

“…To find the minimum capital adequacy ratio—as the first pillar of Basel—required for each bank to prevent contagious defaults in the banking system, Steinbacher and Steinbacher (2015)’s results revealed that larger banks with adequate capital are expected to default less than smaller, poorly capitalized banks and need lower additional capital to avoid bankruptcy when hit by a shock. Similarly, Barroso et al.…”

“… Balance sheet —In the absence of accurate information on interbank loan transactions and the need to deduce it from the banks’ balance sheets, having more granular balance sheets of banks is vital in research in this field (Calimani et al., 2019). By taking more elements of banks’ balance sheets into consideration, a better intuition of the balance sheet will be developed (Li & He, 2012), and it is possible to create more diversity in the parameters (Steinbacher & Steinbacher, 2015; Steinbacher et al., 2016). Finding innovative methods for building more efficient and accurate models to identify interbank asset classes within banks’ balance sheets (Souza, 2016) remains a research opportunity in this field. Central bank —At present, the vast majority of models developed from the interbank market by researchers lack the central bank as a significant, influential player, making those models far from what is happening in the real world.…”

“…This interest has grown significantly, especially in recent years. One of the uses of dynamics in the field of IMM concerns includes its applications in behavioral studies of banks (Hałaj, 2018; Liu et al., 2018; Steinbacher & Steinbacher, 2015), interest rate dynamics studies (Kusnetsov & Veraart, 2019), dynamic formation of interbank networks (Kobayashi & Takaguchi, 2018; León et al., 2018), network resistance analysis (Li & He, 2011), modeling financial contagion (Erol & Ordonez, 2017), and examining the impact of different combinations of macro‐prudential and monetary policies (Popoyan et al., 2020). Another strand of future research in this field focuses on methods of implementing network dynamics, for example, theoretical derivation based on a macroscopic dynamic equation model, which can get a series of conclusions through strict theoretical proof (Jiang & Fan, 2019) and using the multi‐period approach in developing a fully dynamic model of interbank networks (Kusnetsov & Veraart, 2019).…”

“…This factor also plays a vital role in directing future research in this field, especially in recent years. Modeling various types of central bank policies, while the banks could be allowed to recapitalize (Steinbacher & Steinbacher, 2015; Steinbacher et al., 2016), considering the total loss of capitalization of the banking system as a robustness indicator (He & Li, 2017), empirically analyzing the two possible trade‐offs for the role played by higher capital requirements in increasing the resilience of the entire system by strengthening the capital position of individual banks and enhancing contagion by homogenizing banks’ balance sheets (Calimani et al., 2019), and investigating the possibility of combining optimal capital allocation approaches for networks and optimal network efficiency approaches for capital allocation (Diem et al., 2020) are among them.…”