Threadneedle: An Experimental Tool for the Simulation and Analysis of Fractional Reserve Banking Systems

TL;DR

Threadneedle is a detailed multi-agent simulation framework for analyzing fractional reserve banking systems, revealing how regulatory frameworks and accounting definitions influence macroeconomic behavior and credit expansion.

Contribution

It introduces a novel simulation tool based on double entry bookkeeping to explore banking system dynamics and regulatory impacts on macroeconomics.

Findings

Loss provisions can significantly affect systemic behavior.

Basel capital requirements dominate reserve requirements in credit expansion.

Lowering interest rates may restrict loan supply under Basel regulation.

Abstract

Threadneedle is a multi-agent simulation framework, based on a full double entry book keeping implementation of the banking system's fundamental transactions. It is designed to serve as an experimental test bed for economic simulations that can explore the banking system's influence on the macro-economy under varying assumptions for its regulatory framework, mix of financial instruments, and activities of borrowers and lenders. Support is provided for Basel Capital and central bank reserve regulatory frameworks, inter-bank lending and correct handling of loan defaults within the bank accounting framework. In this paper we provide an overview of the design of Threadneedle, and the rational for the double entry book keeping approach used in its implementation. We then provide evidence from a series of experiments using the simulation that the macro-economic behaviour of the banking system is in some cases sensitive to double entry book keeping ledger definitions, and in particular that loss provisions can be systemically affecting. We also show that credit and money expansion in Basel regulated systems is now dominated by the Basel capital requirements, rather than the older central bank reserve requirements. This implies that bank profitability is now the main factor in providing new capital to support lending, meaning that lowering interest rates can act to restrict loan supply, rather than increasing borrowing as currently believed. We also show that long term liquidity flows due to interest repayment act in favour of the bank making the loan, and do not provide any long term throttling effect on loan expansion and money expansion as has been claimed by Keynes and others.