 Has monetary policy fueled the rise in shadow banking?Economic Modelling, 2023, vol. 123, issue C Abstract: How does monetary policy affect the shadow banking sector? Studies exploring the effect of monetary conditions on financial institutions have predominantly focused on traditional banks and disregarded shadow banking. Compiling a novel dataset with disaggregated shadow banking components, we assess the link between ECB's monetary policy setting and the rise of the shadow banking sector in the euro area over the 1999–2019 period. Our empirical analysis robustly demonstrates that monetary policy actions have been associated with a move away from traditional banking to the much riskier shadow banking sector. The magnitude of this effect is three times greater than the regulatory arbitrage effect. We uncover two underlying drivers. First, tight monetary policy promotes shadow banking because financial actors attempt to reduce their funding costs. Second, loose monetary policy expands shadow banking because it intensifies the investors' search for yield. Implied policy recommendations are discussed. Keywords: Shadow banking; Traditional banking; Financial regulation; Monetary policy; Leaning against the wind (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:123:y:2023:i:c:s0264999323000901 DOI: 10.1016/j.econmod.2023.106278 Access Statistics for this article Economic Modelling is currently edited by S. Hall and P. Pauly More articles in Economic Modelling from Elsevier |
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