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Shadow Banking and Bank Capital Regulation

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  • Guillaume Plantin

Abstract

Banks are subject to capital requirements because their privately optimal leverage is higher than the socially optimal one. This is in turn because banks fail to internalize all costs that their insolvency creates for agents who use their money-like liabilities to settle transactions. If banks can bypass capital regulation in an opaque shadow banking sector, it may be optimal to relax capital requirements so that liquidity dries up in the shadow banking sector. Tightening capital requirements may spur a surge in shadow banking activity that leads to an overall larger risk on the money-like liabilities of the formal and shadow banking institutions.

Suggested Citation

  • Guillaume Plantin, 2015. "Shadow Banking and Bank Capital Regulation," The Review of Financial Studies, Society for Financial Studies, vol. 28(1), pages 146-175.
    • Handle: RePEc:oup:rfinst:v:28:y:2015:i:1:p:146-175.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhu055
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    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • 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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