Heterogeneous Banks, Credit Networks, and Corporate Financing

Abstract

Since the global financial crisis, regulatory frameworks such as Basel III have reshaped how banks manage capital, liquidity, and risk. While these reforms aim to strengthen financial stability, their effects propagate unevenly through the real economy — depending critically on the structure of the credit networks that connect banks to firms.

This project develops an agent-based model in which heterogeneous banks (differing in size, capital buffers, and risk appetite) interact with heterogeneous firms across a network of credit relationships. The model is used to examine how regulatory capital constraints — such as CET1 requirements, leverage ratios, and liquidity coverage ratios — propagate through the network and affect the capital structure and financing access of non-financial firms.

The framework is designed to capture second-order effects that standard representative-bank models miss: contagion through shared exposures, credit rationing cascades following idiosyncratic shocks, and the uneven distributional impact of regulation across firm size and sector.

Research Question

How do Basel III-style regulatory capital constraints propagate through heterogeneous credit networks, and how does this propagation affect the capital structure and financing access of non-financial firms across different network positions?

Key Contributions

01

Agent-based framework explicitly modeling heterogeneous bank-firm credit networks, beyond representative-agent approaches common in macro-finance.

02

Captures network-contingent transmission of regulatory shocks — the same capital rule can have very different real effects depending on network position.

03

Designed as a sandbox for regulatory counterfactuals: simulating alternative capital requirements before they are implemented.

04

Connects to the broader literature on financial network contagion, complementing empirical work on credit supply shocks.

Methodology

1

Heterogeneous agent design

Banks differ in size, capital buffers, liquidity, and risk appetite; firms differ in size, sector, and creditworthiness. Agents interact over a network of credit relationships that evolves endogenously.

2

Regulatory constraint modules

Basel III-style requirements — CET1 ratios, leverage ratios, liquidity coverage ratio (LCR), net stable funding ratio (NSFR) — are implemented as binding agent-level constraints that shape lending behavior.

3

Network propagation analysis

Shocks (regulatory tightening, idiosyncratic bank distress) are simulated and traced through the network to measure their effect on aggregate credit supply and the distribution of financing access across firms.

Keywords

Agent-based modeling Banking regulation Credit networks Basel III Financial contagion Capital structure Network analysis

Heterogeneous Banks, Credit Networks, and Corporate Financing: An Agent-Based Framework for Regulatory Impact Analysis

Heterogeneous agent design

Regulatory constraint modules

Network propagation analysis

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