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Shadow Banking and Optimal Capital Requirements

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  • Jingyi Zhang

    (Shanghai Jiao Tong University)

Abstract

This paper studies optimal time-varying capital requirements in a general equilibrium model with two types of financial intermediaries: regulated commercial banks (CBs) and unregulated shadow banks (SBs). Subject to capital regulation, each CB faces higher cost of funds and requires higher lending interest rate when it lends more to the borrower. The borrower internalizes this effect and chooses a lower leverage ratio when financing with a CB than when financing with an unregulated SB. Tightening the capital requirement reduces the credit supply within the CB sector but may stimulate total borrowings through an extensive-margin effect, as more borrowers choose high-leverage SB finance over low-leverage CB finance and the aggregate leverage ratio of all borrowers increases. If the extensive-margin effect outweighs the intensive-margin effect, tightening capital requirement will be expansionary and optimal capital requirements will become countercyclical. (Copyright: Elsevier)

Suggested Citation

  • Jingyi Zhang, 2020. "Shadow Banking and Optimal Capital Requirements," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 38, pages 296-325, October.
    • Handle: RePEc:red:issued:18-160
    DOI: 10.1016/j.red.2020.05.004
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    Cited by:

    1. Johnson, Christopher P., 2021. "International shadow banking and prudential capital controls," Journal of International Money and Finance, Elsevier, vol. 119(C).
    2. Yan Jiang & Yaping Xu & Shengsheng Li, 2022. "How Does Monetary Policy Uncertainty Influence Firms’ Dynamic Adjustment of Capital Structure," SAGE Open, , vol. 12(1), pages 21582440211, January.
    3. Fève, Patrick & Moura, Alban & Pierrard, Olivier, 2022. "The fall in shadow banking and the slow U.S. recovery," Journal of Economic Dynamics and Control, Elsevier, vol. 139(C).
    4. Arsenii Mishin, 2023. "Dynamic Bank Capital Regulation in the Presence of Shadow Banks," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 51, pages 965-990, December.
    5. Ridoy Deb Nath & Mohammad Ashraful Ferdous Chowdhury, 2021. "Shadow banking: a bibliometric and content analysis," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 7(1), pages 1-29, December.
    6. Jiang, Chun & Chang, Ya-Qi & Ge, Xinyu & Si, Deng-Kui, 2023. "Identifying the impact of bank competition on corporate shadow banking: Evidence from China," Economic Modelling, Elsevier, vol. 126(C).
    7. Guo, Shen & Lin, Guiting & Ouyang, Alice Y., 2023. "Are pro-SME credit policies effective? Evidence from shadow banking in China," Economic Modelling, Elsevier, vol. 119(C).

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    More about this item

    Keywords

    Capital requirements; Shadow banking; Credit supply; DSGE models;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • P31 - Political Economy and Comparative Economic Systems - - Socialist Institutions and Their Transitions - - - Socialist Enterprises and Their Transitions
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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