Affiliations: [a] P.N. Lebedev Physical Institute, Moscow, Russia | [b] Bank of Russia, National Research University Higher School of Economics, P.N. Lebedev Physical Institute, Moscow, Russia
Correspondence:
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Corresponding author: Henry Penikas, Bank of Russia, National Research University Higher School of Economics, P.N. Lebedev Physical Institute, Moscow, Russia. E-mail: penikas@hse.ru.
Abstract: COVID-19 pandemic challenges the sustainability of the modern financial system. International central bankers claim that banks are solid. They have accumulated significant capital buffers. Those buffers should be further more augmented by 2027 in line with Basel III reforms. However, disregarding such a consecutive rise in the banking capital adequacy requirements, the US financial authorities undertook an unprecedented step. First time in the country history they lowered the reserve requirement to zero at the end of March 2020. Friedrich von Hayek demonstrated the fragility of the modern fractional reserve banking systems. Together with Ludwig von Mises (von Mises, 1978) he was thus able to predict the Great Depression of 1929 and explain its mechanics much in advance. Thus, we wish to utilize the agent-based modeling technique to extend von Hayek’s rationale to the previously unstudied interaction of capital adequacy and reserve requirement regulation. We find that the full reserve requirement regime even without capital adequacy regulation provides more stable financial environment than the existing one. Rise in capital adequacy adds to modern banking sustainability, but it still preserves the system remarkably fragile compared to the full reserve requirement. We also prove that capital adequacy regulation is redundant when the latter environment is in place. We discuss our findings application to the potential Central Bank Digital Currencies regulation.
Keywords: Agent-based model, reserve requirement, capital adequacy, Basel III, CBDC
