Sustainable Shadow Banking

Guillermo Ordonez

American Economic Journal: Macroeconomics, 2018, vol. 10, issue 1, 33-56

Abstract: Banking regulation is beneficial because it constrains banks' portfolios to prevent excessive risk taking. But given that regulators usually know less than a bank about its investment opportunities, regulation comes at the cost of foregoing profitable investments. I argue that shadow banking improves welfare because it provides a channel to escape excessive regulation that is asymmetrically more valuable for banks with access to efficient investment opportunities. I propose a novel intervention that improves welfare further by taxing shadow activities, subsidizing regulated activities and allowing banks to self-select into being regulated or not.

Date: 2018
Note: DOI: 10.1257/mac.20150346
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Citations: View citations in EconPapers (23)

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Working Paper: Sustainable Shadow Banking (2013)
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