Traditional and Shadow Banks

Edouard Chretien and Victor Lyonnet
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Edouard Chretien: National Institute of Statistics and Economic Studies (INSEE) - Center for Research in Economics and Statistics (CREST)
Victor Lyonnet: Ohio State University (OSU)

Working Paper Series from Ohio State University, Charles A. Dice Center for Research in Financial Economics

Abstract: We propose a theory of the coexistence of traditional and shadow banks. In our model, shadow banks escape the costly regulation traditional banks must comply with, but forgo deposit insurance, which traditional banks can rely upon. In a crisis, shadow banks repay their creditors by selling assets at fire-sale prices to traditional banks, which fund these purchases with insured deposits. Our model is consistent with several facts from the 2007 financial crisis. The analysis implies an increase in traditional banks' debt capacity leads to an increase in the relative size of the shadow banking sector.

JEL-codes: E32 E44 E61 G01 G21 G23 G38 (search for similar items in EconPapers)
Date: 2019-04
New Economics Papers: this item is included in nep-ban, nep-ias and nep-mac
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Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:ecl:ohidic:2019-11

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