Brexit and Financial Stability: An Agent-Based Simulation

Abstract

As the UK and the EU prepare to start negotiations for Brexit, it is important for both sides to comprehend the full extent of the consequences of this process. In this paper, we employ an agent based simulation framework in order to test for the short-term and long-term effects of Brexit on financial stability on both sides of the Channel. The relative strength of the UK economy and the banking sector vis-à-vis the EU is taken under consideration. Our results confirm predictions in the relevant literature regarding the output cost of Brexit, with particular emphasis on the EU, and show that financial stability is an important issue, with the banking system suffering significant losses on both sides, particularly over the longer term. Our findings also suggest that policymakers should take into account dynamic effects that may be caused by UK banks moving to the EU after Brexit. The model results show that if banks in the UK chose to move across the Channel, the negative effects in the EU are mitigated.

Keywords: Brexit, Banking crises, Agent-based finance, Financial stability

JEL Classification: G01, G28, F4, G18