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Shadow Banking and the Four Pillars of Traditional Financial Intermediation

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  • Emmanuel Farhi
  • Jean Tirole

Abstract

Traditional banking is built on four pillars: SME lending, access to public liquidity, deposit insurance, and prudential supervision. This paper unveils the logic of the quadrilogy by putting core services to “special depositors and borrowers” at the heart of the analysis, and makes room for bank and depositor implicit and explicit guarantees. It analyzes how prudential regulation must adjust to the emergence of shadow banking. The model also rationalizes ring fencing between regulated and shadow banking and the sharing of liquidity in centralized platforms to counter syphoning and financial contagion.

Suggested Citation

  • Emmanuel Farhi & Jean Tirole, 2018. "Shadow Banking and the Four Pillars of Traditional Financial Intermediation," EconPol Working Paper 16, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
  • Handle: RePEc:ces:econwp:_16
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    References listed on IDEAS

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    Cited by:

    1. Harris, Milton & Opp, Christian & Opp, Marcus M., 2020. "The aggregate demand for bank capital," CEPR Discussion Papers 14524, C.E.P.R. Discussion Papers.
    2. Taejin Kim & Vishal Mangla, 2019. "Capital Regulation with Two Banking Sectors: Cyclicality and Implementation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 51(2-3), pages 485-537, March.
    3. Martinez-Miera, David & Repullo, Rafael, 2018. "Markets, Banks, and Shadow Banks," CEPR Discussion Papers 13248, C.E.P.R. Discussion Papers.
    4. Martin Hodula, 2018. "Off the Radar: Exploring the Rise of Shadow Banking in the EU," Working Papers 2018/16, Czech National Bank.
    5. Hodula, Martin & Melecky, Ales & Machacek, Martin, 2020. "Off the radar: Factors behind the growth of shadow banking in Europe," Economic Systems, Elsevier, vol. 44(3).
    6. Irani, Rustom & Iyer, Rajkamal & Meisenzahl, Ralf & Peydró, José-Luis, 2021. "The rise of shadow banking: Evidence from capital regulation," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, pages 2181-2235.
    7. Martin Hodula, 2019. "Monetary Policy and Shadow Banking: Trapped between a Rock and a Hard Place," Working Papers 2019/5, Czech National Bank.
    8. Christian Calmès & Raymond Théoret, 2021. "Portfolio analysis of big US banks’ performance: the fee business lines factor," Journal of Banking Regulation, Palgrave Macmillan, vol. 22(2), pages 112-132, June.
    9. Poeschl, Johannes & Zhang, Xue, 2018. "Bank Capital Regulation and Endogenous Shadow Banking Crises," MPRA Paper 92529, University Library of Munich, Germany.
    10. Facundo Piguillem & Guillermo Ordonez, 2015. "Retirement in the Shadow (Banking)," 2015 Meeting Papers 1200, Society for Economic Dynamics.
    11. Z. Mierzwa & З. Межва, 2019. "Жан Тироль: математик-экономист-гуманист // Jean Tirole: Mathematician-Economist-Humanist," Финансы: теория и практика/Finance: Theory and Practice // Finance: Theory and Practice, ФГОБУВО Финансовый университет при Правительстве Российской Федерации // Financial University under The Government of Russian Federation, vol. 23(1), pages 13-26.
    12. Stefan Gebauer & Falk Mazelis, 2019. "Macroprudential Regulation and Leakage to the Shadow Banking Sector," Discussion Papers of DIW Berlin 1814, DIW Berlin, German Institute for Economic Research.
    13. Puriya Abbassi & Rajkamal Iyer & José-Luis Peydró & Paul E. Soto, 2020. "Stressed banks? Evidence from the largest-ever supervisory review," Economics Working Papers 1721, Department of Economics and Business, Universitat Pompeu Fabra.
    14. Chavaz, Matthieu & Elliott, David, 2020. "Separating retail and investment banking: evidence from the UK," Bank of England working papers 892, Bank of England, revised 18 Feb 2021.
    15. Poeschl, Johannes & Zhang, Xue, 2019. "Bank Capital Regulation and Endogenous Shadow Banking Crises," VfS Annual Conference 2019 (Leipzig): 30 Years after the Fall of the Berlin Wall - Democracy and Market Economy 203520, Verein für Socialpolitik / German Economic Association.
    16. Federico Lubello & Abdelaziz Rouabah, 2019. "Capturing macroprudential regulation effectiveness: a DSGE approach with shadow intermediaries," Revista de Estabilidad Financiera, Banco de España, issue Autumn.
    17. Borys Grochulski & Yuzhe Zhang, 2019. "Optimal liquidity policy with shadow banking," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 68(4), pages 967-1015, November.
    18. Bank for International Settlements, 2019. "Unconventional monetary policy tools: a cross-country analysis," CGFS Papers, Bank for International Settlements, number 63, June.
    19. Fang, Sheng & Qian, Xuesong & Zou, Wei, 2020. "The empirical relation between loan risk and collateral in the shadow banking system: Evidence from China’s entrusted loan market," International Review of Economics & Finance, Elsevier, vol. 67(C), pages 42-54.

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    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • G0 - Financial Economics - - General

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