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Shadow Banking and the Four Pillars of Traditional Financial Intermediation
[Securitization without Risk Transfer]

Author

Listed:
  • Emmanuel Farhi
  • Jean Tirole

Abstract

Traditional banking is built on four pillars: small and medium enterprise lending, insured deposit taking, access to lender of last resort (LOLR), and prudential supervision. This article unveils the logic of the quadrilogy by showing that it emerges naturally as an equilibrium outcome in a game between banks and the government. A key insight is that regulation and public insurance services (LOLR, deposit insurance) are complementary. The model also shows how prudential regulation must adjust to the emergence of shadow banking and rationalizes structural remedies to counter bogus liquidity hoarding and financial contagion: ring-fencing between regulated and shadow banking and the sharing of liquidity in centralized platforms.

Suggested Citation

  • Emmanuel Farhi & Jean Tirole, 2021. "Shadow Banking and the Four Pillars of Traditional Financial Intermediation [Securitization without Risk Transfer]," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 88(6), pages 2622-2653.
    • Handle: RePEc:oup:restud:v:88:y:2021:i:6:p:2622-2653.
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    File URL: http://hdl.handle.net/10.1093/restud/rdaa059
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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Retail and shadow banks; Lender of last resort; Deposit insurance; Supervision; Migration; Ring-fencing; CCPs; Narrow banks;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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