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Shadow Banking and the Four Pillars of Traditional Financial Intermediation

Emmanuel Farhi () and Jean Tirole

No 12373, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Traditional banking is built on four pillars: SME lending, access to public liquidity, deposit insurance, and prudential supervision. This vision has been shattered by repeated bailouts of shadow financial institutions. This paper puts "special depositors and borrowers'" at the core of the analysis, provides a rationale for the covariation yielding the quadrilogy, and analyzes how prudential regulation must adjust to the possibility of migration toward less regulated spheres. Ring fencing between regulated and shadow banking and the sharing of liquidity in centralized platforms are motivated by the supervision of syphoning and financial contagion.

Keywords: CCPs.; deposit insurance; lender of last resort; migration; Retail and shadow banks; ring fencing; Supervision (search for similar items in EconPapers)
JEL-codes: E44 E58 G21 G28 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-ias and nep-mac
Date: 2017-10
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