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The Inevitability of Shadowy Banking

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  • Edward J. Kane

Abstract

Shadowy banking is safety-net arbitrage. It employs substitutes for products and activities performed within the traditional banking sector. The shadows obscure organizational and transactions strategies that avoid regulation and extract subsidies by adaptive innovation. Because credit support kicks in when private equity is exhausted, safety nets supply badly structured equity capital-- and not insurance-- to firms that engage in shadowy activities. As coerced equity investors whose liability is unlimited, taxpayers would benefit if information systems and corporate law were revised to give them much the same safeguards and rights of disclosure as a minority shareholder.

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Paper provided by Institute for New Economic Thinking (INET) in its series INET Research Notes with number 25.

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Date of creation: 22 Apr 2013
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Handle: RePEc:thk:rnotes:25

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  1. Kane, Edward J, 1983. "Policy Implications of Structural Changes in Financial Markets," American Economic Review, American Economic Association, American Economic Association, vol. 73(2), pages 96-100, May.
  2. Edward Kane, 2007. "Basel II: A Contracting Perspective," Journal of Financial Services Research, Springer, Springer, vol. 32(1), pages 39-53, October.
  3. Kenneth A. Carow & Edward J. Kane & Rajesh P. Narayanan, 2011. "Safety‐Net Losses from Abandoning Glass–Steagall Restrictions," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 43(7), pages 1371-1398, October.
  4. Gorton, Gary B., 2010. "Slapped by the Invisible Hand: The Panic of 2007," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780199734153, October.
  5. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, Princeton University Press, edition 1, volume 1, number 8973.
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