Capital Injection to Save Bank Crisis

This paper examines causes of banking crises. In particular, we try to explain why banks expand credits rapidly before the crises. We also seek for appropriate recapitalization policy to cope with a systemic banking crisis. To serve these purposes, we construct an agent-based simulation model with asset traders, commercial banks and a central bank. Our experimental results show that microeconomic factors, e.g., prudent credit standard, are crucially important to keep the banks and the economy healthy. There exists an incentive for the banks to decline the banking standards, which can cause rapid credit expansion that induces an asset bubble. This suggests the need for prudential regulation of banks. The monetary authority should also act promptly to save banks in trouble because a prevenient capital injection is more effective and less costly than delayed one