Financial Instability and Basel III Requirements Implementation

This master dissertation presents the impact that the new requirements of capital will have on financial system in particular the implementation of Basel III Agreement. I propose a RBC with baking sector model for emphasizing the effects of the new Basel III Agreement for financial stability. In particular there are six agents in this model: patient households, impatient households, firms and bank. In order to fit real data the following average moments for variables has been chosen from the central bank of Russian federation and stylized facts of RBC models. Using the MatLab's Dynare package the model of this master dissertation has been simulated. The given results have shown that higher capital requirements make stronger the effect of shock and resulted higher profit of the banks and higher repayment rates on loans. This RBC model with banking sector has been constructed. It emphasizes the role of banking sector and financial stability in the economy in general. For further research the interbank market can be added and there is a need to model the Basel III liquidity requirements as well.