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Shadow Banking, Relationship Banking, and the Economics of Depression

Antonio Bianco ()

No 5/15, Working Papers from Sapienza University of Rome, DISS

Abstract: A simple stock-flow consistent methodological account of the influence of financial markets over the real economy is here presented. The model is so devised as to allow a tidy comparison of relationship or shadow banking interpreted as alternative schemes of liquidity (not credit) risk management. The essential mechanism that is here at work is that fluctuations in the composition of property incomes lead to fluctuations in borrowing for non-financial purposes that, in their turn, drive fluctuations in spending. Having this in mind, the model emphasizes the interdependencies in entrepreneurs’ variations in animal spirits, financial institutions’ idiosyncratic liquidity risk management (ILRM), and households’ effective demand. The model key finding is that both relationship and shadow banking entail a pro-cyclical impact and that differences implied in the two cases can be reduced to the different ILRM aggregate cost functions. As for policy implications, the model suggests that securitisation is not per se leading to financial unsustainability, yet regulatory measures aimed at checking predatory lending and the CDO industry are needed: failing these, securitisation is likely to have a depressive impact on non-financial entrepreneurs’ confidence, and hence on the financial sustainability of a growth process.

Keywords: animal spirits; endogenous money; liquidity risk management; securitisation; originate-to-hold; originate-to-distribute. (search for similar items in EconPapers)
JEL-codes: B52 E12 E20 E44 M40 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-fdg, nep-hme and nep-mac
Date: 2015-10
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