Markets, banks, and shadow banks

David Martinez-Miera and Rafael Repullo

No 2234, Working Paper Series from European Central Bank

Abstract: We analyze the effect of bank capital requirements on the structure and risk of a financial system where markets, regulated banks, and shadow banks coexist. Banks face a moral hazard problem in screening entrepreneurs' projects, and they choose whether to be regulated or not. If regulated, a supervisor certifies their capital; if not, they have to rely on more expensive private certification. Under both risk-insensitive and risk-sensitive requirements, safer entrepreneurs borrow from the market and riskier entrepreneurs borrow from banks. But risk-insensitive (sensitive) requirements are especially costly for relatively safe (risky) entrepreneurs, which may shift from regulated to shadow banks. JEL Classification: G21, G23, G28

Keywords: bank regulation; bank supervision; capital requirements; credit screening; credit spreads; loan defaults; market finance; optimal regulation; shadow banks (search for similar items in EconPapers)
Date: 2019-02
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Citations: View citations in EconPapers (9)

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Related works:
Working Paper: Markets, Banks, and Shadow Banks (2018)
Working Paper: Markets, Banks, and Shadow Banks (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20192234

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