This paper explores how different credit market- and banking regulations affect business fluctuations. Capital adequacy- and reserve requirements are analysed for their effect on the

risk of severe downturns. We develop an agent-based macroeconomic model in which finan-

cial contagion is transmitted through balance sheets in an endogenous firm-bank network,

that incorporates firm bankruptcy and heterogeneity among banks to capture the fact that

contagion effects are bank-specific. Using concepts from the empirical literature to identify

amplitude and duration of recessions and expansions we show that more stringent liquidity

regulations are best to dampen output fluctuations and prevent severe downturns. Under

such regulations both leverage along expansions and amplitude of recessions become smaller.

More stringent capital requirements induce larger output fluctuations and lead to deeper,

more fragile recessions. This indicates that the capital adequacy requirement is pro-cyclical

and therefore not advisable as a measure to prevent financial contagion.