The Effects of Prudential Supervision on Bank Resiliency and Profits in a Multi-Agent Setting

This article studies the effects of prudential supervision on bank resiliency and profitability within an agent-based framework that allows us to simulate persistent crisis conditions. It focuses on the stabilizing effect of prudential supervision introduced alongside three "traditional" regulatory instruments: a norm, a market-based CDS insurance mechanism and a tax in the form of a bail-in instrument. The results show that: (i) supervision enhances the regulatory instruments’ efficiency, (ii) the regulatory norm can postpone the bank’s default, but not avoid it, (iii) the CDS mechanism only produces positive results on resiliency and profitability if the regulator supervises, and (iv) the tax bail-in instrument is the most powerful tool in the regulator’s arsenal as it potentiates profitable bank operation under long-lasting crisis conditions.

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