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A Model of Shadow Banking

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  • NICOLA GENNAIOLI
  • ANDREI SHLEIFER
  • ROBERT W. VISHNY

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.

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Bibliographic Info

Article provided by American Finance Association in its journal Journal of Finance.

Volume (Year): 68 (2013)
Issue (Month): 4 (08)
Pages: 1331-1363

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Handle: RePEc:bla:jfinan:v:68:y:2013:i:4:p:1331-1363

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Citations

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Cited by:
  1. Tobias Adrian & Adam B. Ashcraft, 2012. "Shadow banking regulation," Staff Reports 559, Federal Reserve Bank of New York.
  2. Brian Godfrey & Brian Golden, 2013. "Measuring shadow banking in Ireland using granular data," IFC Bulletins chapters, in: Bank for International Settlements (ed.), Proceedings of the Sixth IFC Conference on "Statistical issues and activities in a changing environment", Basel, 28-29 August 2012., volume 36, pages 51-67 Bank for International Settlements.
  3. Song. Fenghua & Thakor, Anjan, 2013. "Notes on financial system development and political intervention," Policy Research Working Paper Series 6350, The World Bank.
  4. Tobias Adrian & Daniel Covitz & Nellie J. Liang, 2013. "Financial stability monitoring," Staff Reports 601, Federal Reserve Bank of New York.
  5. Sudipto Bhattacharya & Georgy Chabakauri & Kjell G. Nyborg, 2012. "Securitized Banking, Asymmetric Information, and Financial Crisis: Regulating Systemic Risk Away," FMG Discussion Papers dp704, Financial Markets Group.
  6. Godfrey, Brian & Golden, Brian, 2012. "Measuring Shadow Banking in Ireland using Granular Data," Quarterly Bulletin Articles, Central Bank of Ireland, pages 82-96, October.
  7. Isil Erel & Taylor D. Nadauld & René M. Stulz, 2011. "Why Did U.S. Banks Invest in Highly-Rated Securitization Tranches?," NBER Working Papers 17269, National Bureau of Economic Research, Inc.
  8. Tobias Adrian & Adam B. Ashcraft, 2012. "Shadow banking: a review of the literature," Staff Reports 580, Federal Reserve Bank of New York.
  9. Pol, Eduardo, 2012. "The preponderant causes of the USA banking crisis 2007–08," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 41(5), pages 519-528.
  10. Tobias Adrian & Adam B. Ashcraft & Nicola Cetorelli, 2013. "Shadow bank monitoring," Staff Reports 638, Federal Reserve Bank of New York.
  11. Christian Calmès & Raymond Théoret, 2012. "Bank systemic risk and the business cycle: Canadian and U.S. evidence," RePAd Working Paper Series UQO-DSA-wp022012, Département des sciences administratives, UQO.
  12. Erel, Isil & Nadauld, Taylor & Stulz, Rene M., 2011. "Why Did U.S. Banks Invest in Highly-Rated Securitization Tranches?," Working Paper Series 2011-16, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
  13. Thomas Philippon, 2012. "Has the U.S. Finance Industry Become Less Efficient? On the Theory and Measurement of Financial Intermediation," NBER Working Papers 18077, National Bureau of Economic Research, Inc.
  14. Carlos Arteta & Mark Carey & Ricardo Correa & Jason Kotter, 2013. "Revenge of the steamroller: ABCP as a window on risk choices," International Finance Discussion Papers 1076, Board of Governors of the Federal Reserve System (U.S.).
  15. Popov, Alexander, 2013. "Monetary policy, bank capital and credit supply: a role for discouraged and informally rejected firms," Working Paper Series 1593, European Central Bank.
  16. Lucyna Gornicka, 2014. "Shadow Banking and Traditional Bank Lending: The Role of Implicit Guarantees," Tinbergen Institute Discussion Papers 14-035/VI/DSF74, Tinbergen Institute, revised 16 Jun 2014.
  17. Adrian, Tobias, 2014. "Financial stability policies for shadow banking," Staff Reports 664, Federal Reserve Bank of New York.
  18. Paraschiv, Florentina & Qin, Minzi, 2013. "Extreme Spillover Between Shadow Banking and Regular Banking," Working Papers on Finance 1312, University of St. Gallen, School of Finance.
  19. Christian Calmès & Raymond Théoret, 2011. "Bank systemic risk and the business cycle: An empirical investigation using Canadian data," RePAd Working Paper Series UQO-DSA-wp322011, Département des sciences administratives, UQO.
  20. Calmès, Christian & Théoret, Raymond, 2014. "Bank systemic risk and macroeconomic shocks: Canadian and U.S. evidence," Journal of Banking & Finance, Elsevier, vol. 40(C), pages 388-402.
  21. Harry DeAngelo & René M. Stulz, 2013. "Why High Leverage is Optimal for Banks," NBER Working Papers 19139, National Bureau of Economic Research, Inc.
  22. Manmohan Singh & Peter Stella, 2012. "Money and Collateral," IMF Working Papers 12/95, International Monetary Fund.

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