Does Basel II destabilize financial markets? An agent-based financial market perspective
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- Hermsen, O. Eur. Phys. J. B (2010) 73: 29. doi:10.1140/epjb/e2009-00382-1
We use a financial market model that is able to replicate stylized facts of financial markets quite successfully. We adjust this model by integrating regulations of Basel II concerning market risk. The result is a considerable destabilization of the regulated financial market with a significant increase of extreme events (extraordinary profits and losses). Since the intention of Basel II regulations is to ensure banks have enough regulatory capital to withstand periods involving extraordinary losses, it is alarming that – on the contrary – these regulations may provoke an increase in precisely such extraordinary events.