Impact of Banking Supervision on Banking System Structure: Conclusion from Agent-Based Modelling

Abstract

The Bank of Russia's policy for banking sector recovery and elimination of non-viable and unscrupulous banks from it receives experts' attention and their mixed response. Our study, in line with the key points of critique, suggests that this policy can, in the medium term, bring down the level of monopolism in the banking system and improve its efficiency, while weakening medium-sized and small banks' positions in the short term. Overall, long-term benefits from proactive supervision policy may significantly outweigh short-term losses owed to a rise in banking business concentration. To study the implications of proactive banking sector recovery we have constructed an agent-based model of the banking sector and calibrated its key variables using Russia's banking sector data. Based on the model we have compared short-term and longterm effects under two supervision regimes, one more and the other less stringent. Model estimation suggests that short-term effects of proactive supervision policy weaken the positions of medium-sized and small banks, including those complying with supervisory requirements. However, as the banking sector gains in soundness, benefits from heightened confidence in these banks and the entire banking system generally exceed short-term losses. The share of medium-sized and small banks in loans and deposits of the banking system eventually proves to be higher than prior to supervision policy enhancement. The monopolism of the banking sector declines and price competition rises. The banking system becomes a more effective economy financing institution, shedding the excessive risk to individual and systemic stability, with the average risk of financed projects remaining unchanged. Meanwhile, medium-sized and small banks' stability improves. We point out that agent-based models provide a helpful tool for studying a wide range of other issues vital to the Russian banking sector.

More is different ... and complex! the case for agent-based macroeconomics

“…The New Keynesian flavor of the model is provided by money, monopolistic competition and sticky prices. Money has usually only the function of unit of account and the nominal rigidities incarnated in sticky prices allow 14 A non exhaustive list includes the Bank of England (Braun-Munzinger et al, 2016;Baptista et al, 2016); the European Central Bank (Montagna and Kok, 2016;Halaj, 2018); Central Bank of Brazil (Da Silva and Tadeu Lima, 2015; Dos Santos and Nakane, 2017); Central Bank of Hungary (Hosszu and Mero, 2017); Bank of Russia (Ponomarenko and Sinyakov, 2018); the IMF (Chan-Lau, 2017); U.S. Office of Financial Research (Bookstaber and Paddrik, 2015); U.S. Internal Revenue Services (Bloomquist and Koehler, 2015).…”

Competition in Russia’s Banking Sector Prior to and After Supervision Policy Enhancement: Conclusions Based on Interest Rate Dispersion and Spread

“…We believe that a bank shows a stable lending growth rate if its volatility is below or equal to the systemic volatility. 16 We assume that banks demonstrating a more unstable growth accumulate excessive risks, thereby contributing to an 14 The study by Ponomarenko and Sinyakov (2018) suggests, as part of a theoretical model, that while banking sector recovery policy has an overall positive effect on banking system efficiency and stability, it may entail a short-term competition weakening, which, under certain circumstances, may affect banking sector stability.…”