Banks, Shadow Banking, and Fragility

Stephan Luck and Paul Schempp

VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy from Verein für Socialpolitik / German Economic Association

Abstract: We study a banking model in which regulatory arbitrage induces the existence of shadow banking next to regulated banks. We show that the size of the shadow banking sector determines its stability. Panic-based runs become possible only if this sector is large. Moreover, if regulated banks conduct shadow banking, a relatively larger shadow banking sector is sustainable. However, crises become contagious and spread to the regulated banking sector. We argue that deposit insurance may fail to eliminate adverse run equilibria in the presence of regulatory arbitrage. It may become tested in equilibrium if regulated banking and shadow banking are intertwined.

JEL-codes: G21 G23 G28 (search for similar items in EconPapers)
Date: 2015
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 (15)

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Related works:
Working Paper: Banks, shadow banking, and fragility (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:vfsc15:113204

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