Prof Matheus Grasselli (McMaster University, Canada) 

Title: An agent-based model for bank formation, bank runs and interbank networks

Abstract: We introduce a simple framework where banks emerge as a response to a natural need in society of individuals with heterogeneous liquidity preferences. We examine bank runs and under what conditions an interbank market  is to be established.

We start with an economy consisting of a group of individuals arranged in a 2-dimensional cellular automate and two assets available for investment. Because of uncertainty, individuals might change their investing preferences and accordingly seek their surroundings neighbours as trading partners to fulfil their new preferences. We demonstrate that the individual uncertainty regarding his preference shock coupled with the possibility of not finding a suitable trading partners when needed give rise to banks as liquidity providers. Using a simple learning process, individuals decide whether or not to join the banks, and through a feedback mechanism we illustrate why banks prevail in the society. We then show how the same uncertainty in individual investing preferences that give rise to banks also causes bank runs.   In the second  level of our analysis, in a similar fashion, banks are treated as agents and use their own learning process to avoid runs and create an interbank market.

In addition to providing a bottom up model for the formation of banks and interbank markets, our model allows us to address under what conditions bank monopolies and frequent banks runs are to be observed, or when an interbank market is more likely to be observed instead. It also provides a test bed to investigate several measures of systemic robustness proposed in the literature, as well as the likely response to different policy changes.