Abstract
We create an agent-based banking model that allows the simulation of leverage cycles and financial contagion. Banks adapt their investment strategies in an evolutionary manner according to the success of their competitors, creating an endogenous loan network and a dynamic asset market. This system exhibits periods of slow risk growth and fast insolvency cascades. We show how the susceptibility of banks to insolvency and contagion over the long term depends on asset price volatility, as well as demonstrating an interdependency between asset and liability-side contagion channels. Our model provides a suitable framework for performing further policy tests.
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