To Basel or Not to Basel? Banking Crises and Contagion

Purpose - The purpose of this paper is to propose an object-oriented model of financial simulations which aims to test the applicability and suitability of the proposed measures of Basel III with respect to the prevention of banking crises.Design/Methodology/Approach - We introduce an object-oriented model of financial simulations in the banking sector, namely VBanking (Virtual Banking). The system is based on behavioural simulation of economic agents and allows for transactions between them, using various forms of financial assets. VBanking has been implemented as an automated standalone model, allowing for repetitive simulations under the same parameter sets, producing an efficient series of statistical data.Findings - Interpretation of the resulting data suggests that some of the criticism against the proposed measures is justified, since neither economic crises nor contagion are diminished under Basel III. At the same time, our findings support that the stability goal is met, at least in part.Research Limitations/Implications - The model encompasses a relatively small part of the banking sector, while we choose not to deal with the production part of the economy. However, these limitations do not hinder the validity and importance of our findings.Originality/Value - The originality of this article lies in the use of an object oriented behavioural model and in the resulting model application that is based on it. This enables us to run a series of simulations with different parameters, the results of which we can then compare. Our findings can contribute to the authorities' efforts to ameliorate the policies of Basel III