Markets, Banks, and Shadow Banks

Rafael Repullo and David Martinez-Miera

No 13248, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We analyze the effect of bank capital requirements on the structure and risk of a financial system where markets, regulated banks, and shadow banks coexist. Banks face a moral hazard problem in screening entrepreneurs' projects, and they choose whether to be regulated or not. If regulated, a supervisor certifies their capital; if not, they have to rely on more expensive private certification. Under both risk-insensitive and risk-sensitive requirements, safer entrepreneurs borrow from the market and riskier entrepreneurs borrow from banks. But risk-insensitive (sensitive) requirements are especially costly for relatively safe (risky) entrepreneurs, which may shift from regulated to shadow banks.

Keywords: Bank regulation; Bank supervision; Capital requirements; Credit screening; Credit spreads; Loan defaults; Optimal regulation; Market finance; Shadow banks (search for similar items in EconPapers)
JEL-codes: G21 G23 G28 (search for similar items in EconPapers)
Date: 2018-10
New Economics Papers: this item is included in nep-ban and nep-cba
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Related works:
Working Paper: Markets, banks, and shadow banks (2019)
Working Paper: Markets, Banks, and Shadow Banks (2018)
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