A Model of Shadow Banking

Nicola Gennaioli, Andrei Shleifer and Robert Vishny

No 576, Working Papers from Barcelona School of Economics

Abstract: We present a model of shadow banking in which financial intermediaries originate and trade loans, assemble these loans into diversified portfolios, and then finance these portfolios externally with riskless debt. In this model: i) outside investor wealth drives the demand for riskless debt and indirectly for securitization, ii) intermediary assets and leverage move together as in Adrian and Shin (2010), and iii) intermediaries increase their exposure to systematic risk as they reduce their idiosyncratic risk through diversification, as in Acharya, Schnabl, and Suarez (2010). Under rational expectations, the shadow banking system is stable and improves welfare. When investors and intermediaries neglect tail risks, however, the expansion of risky lending and the concentration of risks in the intermediaries create financial fragility and fluctuations in liquidity over time.

Keywords: securitization; neglected risk; financial fragility (search for similar items in EconPapers)
JEL-codes: E44 E51 G2 (search for similar items in EconPapers)
Date: 2015-09
New Economics Papers: this item is included in nep-ban and nep-mac
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Citations: View citations in EconPapers (13)

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Related works:
Journal Article: A Model of Shadow Banking (2013)
Working Paper: A Model of Shadow Banking (2013)
Working Paper: A Model of Shadow Banking (2012)
Working Paper: A model of shadow banking (2012)
Working Paper: A Model of Shadow Banking (2011)
Working Paper: A Model of Shadow Banking
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Persistent link: https://EconPapers.repec.org/RePEc:bge:wpaper:576

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