Modelling and simulating the banking sectors of the US, Germany and the UK

| Publication date: 19 Aug 2012 | Theme: Britain & Finance, Macroeconomics | NIESR Author(s): Davis, P; Liadze, I | NIESR Discussion Paper Number: 396

 

The need to understand the dynamics and after-effects of the recent financial crisis, 
the evolution of macroprudential surveillance and the introduction of macroprudential
regulation all require appropriate macroeconomic models of financial institutions and 
markets.  We present models of the banking systems of the UK, US and Germany integrated 
into the NiGEM global macroeconomic model. These estimated models permit an evaluation 
both of the effectiveness of macro-prudential policies and their interaction with monetary and 
fiscal policy. A key policy implication is to remind us that tightening of regulation is not a 
“free good” but does impact on the economy via the cost of credit. Meanwhile, the impact of 
macroprudential policies is quite small on the overall economy, suggesting their use in overall 
macroeconomic stabilisation as a counterpart to monetary policy may be limited although the 
effect on lending growth and hence potentially in restraining credit booms is more marked. 
We contend that increasingly active macroprudential policies will make such models as those 
presented here essential to a correct ongoing calibration and evaluation of policy. 
Keyword tags: 
macroprudential policy
macroeconomic models
banking system
capital adequacy
bank lending spreads
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