ABBA Financial Model

Based on the IMF ABBA simulation created by Jorge A. Chan-Lau

Based on the IMF ABBA simulation created by Jorge A. Chan-Lau

Understanding the effects of regulatory capital reserve and leverage requirements requires understanding their effects on the banking sector as a whole, and the resulting risk exposure for individual banks.

From the paper:

Abstract A thorough analysis of risks in the banking system requires incorporating banks’ inherent heterogeneity and adaptive behavior in response to shocks and changes in business conditions and the regulatory environment. ABBA is an agent-based model for analyzing risks in the banking system in which banks’ business decisions drive the endogenous formation of interbank networks. ABBA allows for a rich menu of banks’ decisions, contingent on banks’ balance sheet and capital position, including dividend payment rules, credit expansion, and dynamic balance sheet adjustment via risk-weight optimization. The platform serves to illustrate the effect of changes on regulatory requirements on solvency, liquidity, and interconnectedness risk.

Running the Simulation


n_banks: Initial number of banks

LIBOR_rate: The interbank lending rate

rfree: initial deposits in a bank

reserve_rates: risk-free lending rate, sets the initial deposit rate for banks

min_reserves_ratio: required ratio of reserves to equity

CAR: required capital adequacy ratio

initial_equity: Starting bank equity

bankrupt_liquidation: Set to 0 if bank liquidates loans at face value, 1 if bank sells the assets at fire sale prices

n_firms: Initial number of firms - which originate loans

n_savers: Initial number of savers.