Deposit insurance and the coexistence of commercial and shadow banks

Stephen LeRoy and Rish Singhania

Annals of Finance, 2020, vol. 16, issue 2, No 1, 159-194

Abstract: Abstract We investigate how deposit insurance affects the structure of the financial system in a general equilibrium setting in which a government insurer guarantees deposits at commercial banks, but not at shadow banks. With deposit-based or risky-asset-based insurance premia, price distortions induced by subsidized deposit insurance benefit shadow banks, by allowing these banks to trade to their advantage. Insured commercial banks and uninsured shadow banks coexist under subsidized deposit insurance. Capital requirements on commercial banks make shadow banking more attractive. The asset price distortion is eliminated when the aggregate subsidy to unsuccessful commercial banks equals the aggregate penalty to successful banks.

Keywords: Deposit insurance; Shadow banks; Bank regulation; Capital requirements (search for similar items in EconPapers)
JEL-codes: G21 G23 G28 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s10436-020-00359-z

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